wtdpapb: Creates input for the stochastic dominance function stochdom2

In generalCorr: Generalized Correlations, Causal Paths and Portfolio Selection

Creates input for the stochastic dominance function stochdom2

Description

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.

Usage

wtdpapb(xa, xb)

Arguments

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

Value

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

Note

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.

Author(s)

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

References

Vinod, H. D.', 'Hands-On Intermediate Econometrics Using R' (2008) World Scientific Publishers: Hackensack, NJ. https://www.worldscientific.com/worldscibooks/10.1142/12831

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

See Also stochdom2

Examples

 ## Not run: 
 set.seed(234);x=sample(1:30);y=sample(5:34)
 wtdpapb(x,y)
## End(Not run)

generalCorr documentation built on Oct. 10, 2023, 1:06 a.m.