Investors’ Preference Towards Risk: Evidence from the Taiwan Stock and Stock Index Futures Markets

24 Pages Posted: 4 Mar 2014

See all articles by Zhuo Qiao

Zhuo Qiao

University of Macau

Ephraim Clark

Middlesex University Business School

Wing‐Keung Wong

Hong Kong Baptist University (HKBU)

Date Written: March 2014

Abstract

We apply the stochastic dominance (SD) tests proposed by Linton et al. (2005) and Davidson and Duclos (2000) for risk averters and risk seekers to examine investors’ preferences with respect to the Taiwan stock index and its corresponding index futures. We find that there is no first‐order SD relationship between Taiwan spot and futures. However, for second‐ and third‐order SD, we find that spot dominates futures for risk averters whereas futures dominates spot for risk seekers. The implication is that to maximize their expected utilities, risk averters prefer to buy stocks, whereas risk seekers prefer long index futures.

Keywords: Stochastic dominance, Stock index futures, Risk averter, Risk seeker, Utility maximization

JEL Classification: C14, G12, G15

Suggested Citation

Qiao, Zhuo and Clark, Ephraim and Wong, Wing‐Keung, Investors’ Preference Towards Risk: Evidence from the Taiwan Stock and Stock Index Futures Markets (March 2014). Accounting & Finance, Vol. 54, Issue 1, pp. 251-274, 2014, Available at SSRN: https://ssrn.com/abstract=2404101 or http://dx.doi.org/10.1111/j.1467-629X.2012.00508.x

Zhuo Qiao (Contact Author)

University of Macau ( email )

P.O. Box 3001
Macau

Ephraim Clark

Middlesex University Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom

Wing‐Keung Wong

Hong Kong Baptist University (HKBU)

Department of Economics
Kowloon, Hong Kong
Hong Kong

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