Title: Testing for prospect and Markowitz stochastic dominance efficiency
Authors: Nikolas Topaloglou - Athens University of Economics and Business Research Center (Greece) [presenting]
Stelios Arvanitis - RC-AUEB (Greece)
Abstract: Non-parametric tests are developed for prospect stochastic dominance Efficiency (PSDE) and Markowitz stochastic dominance efficiency (MSDE) with rejection regions determined by block bootstrap re-sampling techniques. Under the appropriate conditions we show that they are asymptotically conservative and consistent. We engage into Monte Carlo experiments to assess the finite sample size and power of the tests allowing for the presence of numerical errors. We use the tests to empirically establish whether the value-weighted market portfolio is the best choice of individuals with preferences satisfying locally convex utility schemes. Our results indicate that we cannot reject the hypothesis of prospect stochastic dominance efficiency for the market portfolio.This is supportive of the claim that the particular portfolio can be rationalized as the optimal choice for any S-shaped utility function. Instead, we reject the hypothesis for Markowitz stochastic dominance,which could imply that there exist reverse S-shaped utility functions that do not rationalize the market portfolio.