wtdpapb function

Creates input for the stochastic dominance function stochdom2

Stochastic dominance is a sophisticated comparison of two distributions of stock market returns. The dominating distribution is superior in terms of mean, variance, skewness and kurtosis respectively, representing dominance orders 1 to 4, without directly computing four moments. Vinod(2008) sec. 4.3 explains the details. The `wtdpapb' function creates the input for stochdom2 which in turn computes the stochastic dominance. See Vinod (2004) for details about quantitative stochastic dominance.

wtdpapb(xa, xb)

Arguments

• xa: Vector of (excess) returns for the first investment option A or values of any random variable being compared to another.
• xb: Vector of returns for the second option B

Returns

• wpa: Weighted vector of probabilities for option A

• wpb: Weighted vector of probabilities for option B

• dj: Vector of interval widths (distances) when both sets of data are forced on a common support

Note

Function is needed before using stochastic dominance

In Vinod (2008) where the purpose of wtdpapb is to map from standard expected utility theory' weights to more sophisticated non-expected utility theory' weights using Prelec's (1998, Econometrica, p. 497) method. These weights are not needed here. Hence we provide the function prelec2

which does not use Prelec weights at all, thereby simplifying and speeding up the R code provided in Vinod (2008). This function avoids sophisticated `non-expected' utility theory which incorporates commonly observed human behavior favoring loss aversion and other anomalies inconsistent with precepts of the expected utility theory. Such weighting is not needed for our application.

Examples

## Not run:

 set.seed(234);x=sample(1:30);y=sample(5:34)
 wtdpapb(x,y)
## 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 stochdom2

Author(s)

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