SMU SOE Online Seminar (Oct 12, 2020, 4pm-5.30pm): Testing Stochastic Dominance with Many Conditioning Variables

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TOPIC:

TESTING STOCHASTIC DOMINANCE WITH MANY CONDITIONING VARIABLES

ABSTRACT We propose a test of the hypothesis of conditional stochastic dominance in the presence of many conditioning variables (whose dimension may grow to inﬁnity as the sample size diverges). Our approach builds on a semiparametric location scale model in the sense that the conditional distribution of the outcome given the covariates is characterized by a nonparametric mean function and a nonparametric skedastic function with an independent innovation whose distribution is unknown. We propose to estimate the nonparametric mean and skedastic regression functions by the ℓ₁-penalized nonparametric series estimation with thresholding. Under the sparsity assumption, where the number of truly relevant series terms are relatively small (but their identities are unknown), we develop the estimation error bounds for the regression functions and series coeﬃcients estimates allowing for the time series dependence. We derive the asymptotic distribution of the test statistic, which is not pivotal asymptotically, and introduce the smooth stationary bootstrap to approximate its sample distribution. We investigate the ﬁnite sample performance of the bootstrap critical values by a set of Monte Carlo simulations. Finally, our method is illustrated by an application to stochastic dominance among portfolio returns given all the past information. Keywords: Bootstrap, empirical process, home bias, LASSO, power boosting, sparsity. JEL Codes: C10, C12, C15. Click here to view the paper. Click here to view the CV.		This seminar will be held via Zoom. A confirmation email with the Zoom details will be sent to the registered email by 9 October 2020.
		PRESENTER Myung Hwan Seo Seoul National University
		RESEARCH FIELD Econometrics
		DATE: 12 October 2020 (Monday)
		TIME: 4.00pm - 5.30pm

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