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

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.

Review of Matrix Theory with Applications in Education and Decision Sciences

“…There are many applications in different financial markets as well, for example, warrant markets (Chan, et al, 2012;, stock markets (Demirer, et al, 2019;Fong, et al, 2008;Qiao, et al, 2008aQiao, et al, ,b, 2011Wong and Bian, 2000;Xu, et al, 2017, future markets (Clark, et al, 2016;Lam, et al, 2016;Qiao, et al, 2012Qiao, et al, , 2013Lean, et al, 2010Lean, et al, , 2015, bond (Kung and Wong, 2006;Liew, et al, 2010;Chow, et al, 2019), currency (Owyong, etala 2015;Agarwal, et al, 2004), and housing markets (Qiao, and Wong, 2015;Tsang, et al, 2016;Lam, et al, 2016;Li, et al, 2014).…”