Stochastic Dominance and Behavior towards Risk: The Market for iShares
Hong Kong Baptist University (HKBU)
J. Kenton Zumwalt
Colorado State University - Department of Finance & Real Estate
March 20, 2009
Prospect theory suggests that risk seeking can occur when investors face losses and thus an S-shaped utility function can be useful in explaining investor behavior. Using stochastic dominance procedures, Post and Levy (2005) find evidence of reverse S-shaped utility functions. This is consistent with investors exhibiting risk-seeking tendencies in bull markets and risk aversion in bear markets. We use both ascending and descending stochastic dominance procedures to test for risk averse and risk seeking behavior. By partitioning iShares’ return distributions into negative and positive return regions, we find evidence of all four utility functions: concave, convex, S-shaped and reverse S-shaped.
Number of Pages in PDF File: 26
Keywords: stochastic dominance; risk aversion, risk seeking
JEL Classification: G11, G15working papers series
Date posted: March 22, 2009 ; Last revised: January 19, 2012
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