Testing for Time Stochastic Dominance

Kyungho Lee, Oliver Linton and Yoon-Jae Whang ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We propose nonparametric tests for the null hypothesis of time stochastic dominance. Time stochastic dominance makes a partial order of different prospects over time based on the net present value criteria for general utility and time discount function classes. For example, time stochastic dominance can be used for ranking investment strategies or environmental policies based on the expected net present value of the future benefits. We consider an Lp integrated test statistic and derive its large sample distribution. We suggest a path-wise bootstrap procedures that allows for time dependence in a panel data structure. In addition to the least favorable case based bootstrap method, we describe two approaches, the contact-set approach and the numerical delta method, for the purpose of enhancing a power of the test. We prove the asymptotic validity of our testing procedures. We investigate the finite sample performance of the tests in simulation studies. As an illustration, we apply the proposed tests to evaluate the welfare improvement of the Thailand’s Million Baht Village Fund Program.

Keywords: Bootstrap; Discounting; Stochastic Dominance; Testing (search for similar items in EconPapers)
JEL-codes: C10 C12 C14 (search for similar items in EconPapers)
Date: 2020-12-10
New Economics Papers: this item is included in nep-ecm, nep-ore, nep-sea and nep-upt
Note: obl20
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:20121

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