Book Description

We consider second, third, fourth and fifth order stochastic dominance (SSD, TSD, FOSD and FISD, respectively) as well as decreasing absolute risk aversion (DARA) stochastic dominance (DSD). For comparison with DSD we also consider stochastic dominance (ESD) based on CARA utility functions. Their relevance in practice arises from empirical evidence on individual preferences fitting to preference models underlying such stochastic dominance relations. Assuming a known, discrete and finite probability distribution we derive necessary and sufficient efficiency tests under the six types of stochastic dominance. Simple arguments yield well-known SSD and TSD efficiency tests which are subsequently used to develop new FOSD, FISD, DSD and ESD efficiency tests. We provide numerical demonstration using stock market data of the US.