stochdom2 function

Compute vectors measuring stochastic dominance of four orders.

Stochastic dominance originated as a sophisticated comparison of two distributions of stock market returns. The dominating distribution is superior in terms of local mean, variance, skewness, and kurtosis, respectively. However, stochastic dominance orders 1 to 4 are really not related to the four moments. Some details are in Vinod (2022, sec. 4.3) and vignettes. Nevertheless, this function uses the output of `wtdpapb.' and Anderson's algorithm. Of course, Anderson's method remains subject to the trapezoidal approximation avoided by exact stochastic dominance methods.

stochdom2(dj, wpa, wpb)

Arguments

• dj: Vector of (unequal) distances of consecutive intervals defined on common support of two probability distributions being compared
• wpa: Vector of the first set of (weighted) probabilities
• wpb: Vector of the second set of (weighted) probabilities

Returns

• sd1b: Vector measuring stochastic dominance of order 1, SD1

• sd2b: Vector measuring stochastic dominance of order 2, SD2

• sd3b: Vector measuring stochastic dominance of order 3, SD3

• sd4b: Vector measuring stochastic dominance of order 4, SD4

Note

The input to this function is the output of the function wtdpapb.

Examples

## Not run:

 set.seed(234);x=sample(1:30);y=sample(5:34)
 w1=wtdpapb(x,y) #y should dominate x with mostly positive SDs
 stochdom2(w1$dj, w1$wpa, w1$wpb) 
## End(Not run)

References

Vinod, H. D.', 'Hands-On Intermediate Econometrics Using R' (2008) World Scientific Publishers: Hackensack, NJ. https://www.worldscientific.com/worldscibooks/10.1142/12831

Vinod, H. D. 'Ranking Mutual Funds Using Unconventional Utility Theory and Stochastic Dominance,' Journal of Empirical Finance Vol. 11(3) 2004, pp. 353-377.

See Also

See Also wtdpapb

Author(s)

Prof. H. D. Vinod, Economics Dept., Fordham University, NY