Premium
MARGINAL CONDITIONAL STOCHASTIC DOMINANCE, STATISTICAL INFERENCE, AND MEASURING PORTFOLIO PERFORMANCE
Author(s) -
Chow K. Victor
Publication year - 2001
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2001.tb00769.x
Subject(s) - econometrics , portfolio , stochastic dominance , economics , equity (law) , homoscedasticity , heteroscedasticity , financial economics , political science , law
A simple statistical test is developed for marginal conditional stochastic dominance (MCSD). The MCSD is an extension of second‐degree stochastic dominance. As such, without specification of the return‐generating process, it can rank securities according to marginal changes of return distributions conditionally to the distribution of the market proxy, thereby proving a powerful technique for measuring portfolio performance. Although the MCSD test is asymptotic and conservative, under both the hypotheses of homoskedasticity and heteroskedasticity, it has power to detect the dominance alternative for samples with more than 300 observations. For an illustration, the MCSD test is applied to international equity markets. The test is able to show that nine of twenty‐eight equity markets are dominated by the world market. JEL classification: G11, C49