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Aggregate investor preferences and beliefs in stock market: A stochastic dominance analysis

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  • Fang, Yi

Abstract

This paper analyzes whether the market portfolio is efficiently related to benchmark portfolios formed on size, value, momentum and reversal with various utility theories by using stochastic dominance criteria. The results support the prospect theory including assumption of loss aversion at monthly and yearly horizons, which indicates the market utility is S-shaped, and steeper for losses than for gains. And, the findings do not provide convincing evidence for positive skewness preference. Therefore, it should probe into asset pricing model and financial puzzles by prospect theory preferences. It may thus be difficult for the market to benefit from the asset through its features on skewness or other higher order central moment. We also develop several bootstrap procedures with favorable properties in statistical size and power for testing stochastic dominance efficiency.

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  • Fang, Yi, 2012. "Aggregate investor preferences and beliefs in stock market: A stochastic dominance analysis," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 528-547.
    • Handle: RePEc:eee:empfin:v:19:y:2012:i:4:p:528-547
    DOI: 10.1016/j.jempfin.2012.04.008
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    Cited by:

    1. Fang, Yi & Niu, Hui & Lin, Yuen, 2023. "Ex-ante Valuation based on Prospect Theory," MPRA Paper 116386, University Library of Munich, Germany.
    2. Post, Thierry & Kopa, Miloš, 2013. "Aggregate investor preferences and beliefs: A comment," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 187-190.
    3. Emilios C. C Galariotis & Phil Holmes & Vasileios Kallinterakis & Xiaodong S. Ma, 2014. "Market states, expectations, sentiment and momentum: How naive are investors?," Post-Print hal-00943345, HAL.

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    More about this item

    Keywords

    Stock market efficiency; Bootstrap; Stochastic dominance; Prospect theory; Loss aversion; Skewness preference;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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