Futures versus Stocks: A Stochastic Dominance Study in Malaysian Markets

35 Pages Posted: 17 May 2009 Last revised: 21 Mar 2012

See all articles by Hooi Hooi Lean

Hooi Hooi Lean

Universiti Sains Malaysia

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

Wing-Keung Wong

Asia University, Department of Finance

Date Written: May 17, 2009

Abstract

This paper applies stochastic dominance (SD) tests to examine the dominance relationship between the futures and spot markets in Malaysia, the preferences for the risk-averse and risk-seekers in these markets, the existence of arbitrage opportunities, and whether the markets are efficient and rational. Our results show that there is no arbitrage opportunity in the Malaysian markets and that the Malaysian stock and futures markets can be considered efficient and rational. We find that the spot dominates the futures market on the downside risk, whereas futures dominate spot on the upside profits. In addition, we find that for the risk-averse, spot dominates futures under second-order SD (SSD), while for risk-seekers, futures dominate spot under SSD. This implies that the risk-averse prefer to buy indexed stocks, while risk-seekers are attracted to long index futures to maximize their expected utilities, but not their wealth. Based on our findings, the SSD relationship becomes stronger in the post-Mahathir sub-period.

Keywords: stochastic dominance, index futures, arbitrage opportunity, Malaysian

JEL Classification: C12, G14, G15

Suggested Citation

Lean, Hooi Hooi and Lien, Donald and Wong, Wing-Keung, Futures versus Stocks: A Stochastic Dominance Study in Malaysian Markets (May 17, 2009). Available at SSRN: https://ssrn.com/abstract=1406132 or http://dx.doi.org/10.2139/ssrn.1406132

Hooi Hooi Lean (Contact Author)

Universiti Sains Malaysia ( email )

Economics Program
School of Social Sciences
USM, Penang 11800
Malaysia
604-6532663 (Phone)
604-6570918 (Fax)

HOME PAGE: http://www.soc.usm.my/LeanPages/index.html

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

Wing-Keung Wong

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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