Tests for almost stochastic dominance

Abstract

We introduce a 2-dimensional stochastic dominance (2DSD) index to characterize both strict and almost stochastic dominance. Based on this index, we derive an estimator for the minimum violation ratio (MVR), also known as the critical parameter, of the almost stochastic ordering condition between two variables. We determine the asymptotic properties of the empirical 2DSD index and MVR for the most frequently used stochastic orders. We also provide conditions under which the bootstrap estimators of these quantities are strongly consistent. As an application, we develop consistent bootstrap testing procedures for almost stochastic dominance. The performance of the tests is checked via simulations and the analysis of real data.

Keywords:

• Bootstrap consistency
• Lorenz curve
• stochastic orders
• violation ratio

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