Stochastic Dominance and Investors’ Behavior towards Risk: The Hong Kong Stocks and Futures Markets

30 Pages Posted: 20 Feb 2010

See all articles by Hooi Hooi Lean

Hooi Hooi Lean

Universiti Sains Malaysia

Kin Lam

Hong Kong Baptist University (HKBU)

Wing-Keung Wong

Asia University, Department of Finance

Date Written: February 18, 2010

Abstract

This paper applies stochastic dominance (SD) tests to examine the dominance relationships between the futures and spot markets in Hong Kong. We also analyze the preferences for the risk averters, risk seekers, prospect investors, and Markowitz investors with further in dept of their positive and negative domains in these markets. We find that for the risk averters, spot dominates futures while for the risk seekers, futures dominate spot. This implies that the risk averters prefer to buy indexed stocks, while risk seekers are attracted to long index futures to maximize their expected utilities, but not necessary their wealth. We also conclude that in general, the prospect investors prefer spot in the positive domain and prefer futures in the negative domain while the Markowitz investors prefer spot in the negative domain and prefer futures in the positive domain.

Keywords: stochastic dominance, stock index futures, risk preference, S-shape utility functions

JEL Classification: C14, G12, G15

Suggested Citation

Lean, Hooi Hooi and Lam, Kin and Wong, Wing-Keung, Stochastic Dominance and Investors’ Behavior towards Risk: The Hong Kong Stocks and Futures Markets (February 18, 2010). Available at SSRN: https://ssrn.com/abstract=1554825 or http://dx.doi.org/10.2139/ssrn.1554825

Hooi Hooi Lean

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

Kin Lam

Hong Kong Baptist University (HKBU) ( email )

Department of Finance and Decision Sciences Renfrew Road
Kowloon
HONG KONG
00 852 2339 5007 (Phone)
00 852 2339 5585 (Fax)

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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