COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1356

Consistent Testing for Stochastic Dominance: A Subsampling Approach

Oliver Linton, Esfandiar Maasoumi and Yoon-Jae Whang

February 2002

We propose a procedure for estimating the critical values of the Klecan, McFadden, and McFadden (1990) test for first and second order stochastic dominance in the general k-prospect case. Our method is based on subsampling bootstrap. We show that the resulting test is consistent. We allow for correlation amongst the prospects and for the observations to be autocorrelated over time. Importantly, the prospects may be the residuals from certain conditional models.

Keywords: Bootstrap, Prospect theory, Stochastic dominance

JEL Classification: C12, C14, C15, C52