Does Risk Seeking Drive Stock Prices? A Stochastic Dominance Analysis of Aggregate Investor Preferences and Beliefs

Post, Thierry; Levy, Haim

doi:10.1093/rfs/hhi021

Cited by 164 publications

(85 citation statements)

References 34 publications

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“…It is well known that investors may exhibit risk-seeking behavior (e.g., Levy and Levy, 2004;Markowitz, 1952;Post and Levy, 2005;Tversky and Kahneman, 1981). In order to examine the preference of risk-seeking investors between portfolios with and without gold, we adopt the RSD theory by using RSD test statistics T j R (j = 1, 2 and 3), as explained in Section 3.…”

Section: Sd Analysis For Risk Seekers (Rsd)mentioning

confidence: 99%

Is gold different for risk-averse and risk-seeking investors? An empirical analysis of the Shanghai Gold Exchange

Hoang

Wong

Zhu³

2015

Economic Modelling

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Section: Sd Analysis For Risk Seekers (Rsd)mentioning

confidence: 99%

Is gold different for risk-averse and risk-seeking investors? An empirical analysis of the Shanghai Gold Exchange

Hoang

Wong

Zhu³

2015

Economic Modelling

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“…These days, it is popular to apply SD to explain financial theories and anomalies, for example, McNamara (1998), Post and Levy (2002), Post (2003), Kuosmanen (2004) and Fong et al (2005). Some apply the Levy and Levy approach to study risk averse and risk seeking behaviors.…”

Section: Discussionmentioning

confidence: 99%

“…Some apply the Levy and Levy approach to study risk averse and risk seeking behaviors. For example, Post and Levy (2002) study risk seeking behaviors in order to explain the cross-sectional pattern of stock returns and suggest that the reverse S-shaped utility functions can explain stock returns, with risk aversion for losses and risk seeking for gains reflecting investors' twin desire for downside protection in bear markets and upside potential in bull markets. Using the second order PSD and MSD introduced by Levy and Levy is too restrictive.…”

Section: Discussionmentioning

confidence: 99%

Prospect and Markowitz stochastic dominance

2007

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Levy and Levy ( , 2004 develop the Prospect and Markowitz stochastic dominance theory with S-shaped and reverse S-shaped utility functions for investors. In this paper, we extend Levy and Levy's Prospect Stochastic Dominance theory (PSD) and Markowitz Stochastic Dominance theory (MSD) to the first three orders and link the corresponding S-shaped and reverse S-shaped utility functions to the first three orders. We also provide experiments to illustrate each case of the MSD and PSD to the first three orders and demonstrate that the higher order MSD and PSD cannot be replaced by the lower order MSD and PSD.Prospect theory has been regarded as a challenge to the expected utility paradigm. Levy and prove that the second order PSD and MSD satisfy the expected utility paradigm. In our paper we take Levy and Levy's results one step further by showing that both PSD and MSD of any order are consistent with the expected utility paradigm.Furthermore, we formulate some other properties for the PSD and MSD including the hierarchy that exists in both PSD and MSD relationships; arbitrage opportunities that exist in the first orders of both PSD and MSD; and that for any two prospects under certain conditions, their third order MSD preference will be 'the opposite' of or 'the same' as their counterpart third order PSD preference. By extending Levy and Levy's work, we provide investors with more tools for empirical analysis, with which they can identify the first order PSD and MSD prospects and discern arbitrage opportunities that could increase his/her utility as well as wealth and set up a zero dollar portfolio to make huge profit. Our tools also enable investors to identify the third order PSD and MSD prospects and make better choices.

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“…It has been used, for example, to analyze aggregated investor preferences and beliefs by Post and Levy (2005). De Giorgi (2005) as well as Russell and Seo (1980) have applied the SSD concept to a theoretical portfolio choice problem and discuss the properties of the SSD criterion compared to the mean-variance approach.…”

Section: Introductionmentioning

confidence: 99%

Improved Portfolio Choice Using Second-Order Stochastic Dominance*

2014

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Abstract. Constructing portfolios based on second-order stochastic dominance (SSD) is theoretically attractive since all risk-averse investors would prefer a dominating portfolio. However, choosing among SSD efficient portfolios is a challenge without an obvious ranking metric. We explore particular choices based on Kuosmanen (2004) plus Kopa and Post (2011), comparing their performance to other SSD-related strategies and to standard portfolio choice approaches. These SSD-related choices outperform portfolios chosen based on their Sharpe ratio, information ratio, or using equal weights. Portfolios based on minimum variance that also match the benchmark's mean return perform on a par with the SSD-related choices.

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Does Risk Seeking Drive Stock Prices? A Stochastic Dominance Analysis of Aggregate Investor Preferences and Beliefs

Cited by 164 publications

References 34 publications

Is gold different for risk-averse and risk-seeking investors? An empirical analysis of the Shanghai Gold Exchange

Is gold different for risk-averse and risk-seeking investors? An empirical analysis of the Shanghai Gold Exchange

Prospect and Markowitz stochastic dominance

Improved Portfolio Choice Using Second-Order Stochastic Dominance*

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