Stochastic Dominance and Investors’ Behavior towards Risk: The Hong Kong Stocks and Futures Markets
30 Pages Posted: 20 Feb 2010
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Thierry Post and Haim Levy
-
Preferences Over Meyer's Location-Scale Family
By Wing-keung Wong and Chenghu Ma
-
On Testing the Equality of the Multiple Sharpe Ratios, with Application on the Evaluation of Ishares
By Pui-lam Leung and Wing-keung Wong
-
On the Markowitz Mean-Variance Analysis of Self-Financing Portfolios
By Zhidong Bai, Huixia Liu, ...
-
w-MPS Risk Aversion and the CAPM
By Chenghu Ma and Phelim P. Boyle
-
Stochastic Dominance and Risk Measure: A Decision-Theoretic Foundation for VAR and C-Var
By Wing-keung Wong and Chenghu Ma
-
Prospect Theory, Indifference Curves, and Hedging Risks
By Udo Broll, Martin Egozcue, ...