Description Usage Arguments Value Note Author(s) References See Also Examples

Stochastic dominance is a sophisticated comparison of two distributions of stock market returns. The dominating distribution is superior in terms of mean, variance, skewness and kurtosis respectively, representing dominance orders 1 to 4, without directly computing four moments. Vinod(2008) sec. 4.3 explains the details. The ‘wtdpapb’ function creates the input for stochdom2 which in turn computes the stochastic dominance. See Vinod (2004) for details about quantitative stochastic dominance.

1 | ```
wtdpapb(xa, xb)
``` |

`xa` |
Vector of (excess) returns for the first investment option A or values of any random variable being compared to another. |

`xb` |
Vector of returns for the second option B |

`wpa` |
Weighted vector of probabilities for option A |

`wpb` |
Weighted vector of probabilities for option B |

`dj` |
Vector of interval widths (distances) when both sets of data are forced on a common support |

Function is needed before using stochastic dominance

In Vinod (2008) where the purpose of `wtdpapb`

is to map from standard
‘expected utility theory’ weights to more sophisticated 'non-expected utility
theory' weights using Prelec's (1998, Econometrica, p. 497) method. These
weights are not needed here. Hence we provide the function `prelec2`

which does not use Prelec weights at all, thereby simplifying and speeding up
the R code provided in Vinod (2008). This function avoids sophisticated ‘non-expected’
utility theory which incorporates commonly observed human behavior favoring
loss aversion and other anomalies inconsistent with precepts of the
expected utility theory. Such weighting is not needed for our application.

Prof. H. D. Vinod, Economics Dept., Fordham University, NY

Vinod, H. D.', 'Hands-On Intermediate Econometrics Using R' (2008) World Scientific Publishers: Hackensack, NJ. https://www.worldscientific.com/worldscibooks/10.1142/6895

Vinod, H. D. 'Ranking Mutual Funds Using Unconventional Utility Theory and Stochastic Dominance,' Journal of Empirical Finance Vol. 11(3) 2004, pp. 353-377.

See Also `stochdom2`

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