Stochastic Dominance Tests for Selecting Acceptable Debt Issuance Strategies

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Abstract
The use of the Stochastic Dominance (SD) ordering rules in selecting a set of acceptable debt issuance strategies is examined. A procedure for selecting among alternative strategies on both the timing of issuance and maturity composition of a portfolio of liabilities is formulated. An application of the SD rules provides an effective analytical alternative to subjective judgment in determining debt timing policy when there are uncertain future costs. The SD approach enables a choice of strategies where there are specific stated assumptions on the nature of the underlying utility functions; the decisions are not based on subjective estimates of utility. An application of the ordering rules to the debt timing decision requires the use of a solution procedure applicable to a multi-period case having nonstationary probability functions over time. An application of the model to a small sample problem indicates the information requirements, SD test results, and the evaluation of the tests.

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