Oliver Linton, Kyungchul Song and Yoon-Jae Whang

Published February 2008

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We propose a new method of testing stochastic dominance which improves on existing tests based on bootstrap or subsampling. Our test requires estimation of the contact sets between the marginal distributions. Our tests have asymptotic sizes that are exactly equal to the nominal level uniformly over the boundary points of the null hypothesis and are therefore valid over the whole null hy- pothesis. We also allow the prospects to be indexed by in…nite as well as …nite dimensional unknown parameters, so that the variables may be residuals from nonparametric and semiparametric models. Our simulation results show that our tests are indeed more powerful than the existing subsampling and recentered bootstrap.