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Stochastic Dominance Statistics for Risk Averters and Risk Seekers: An Analysis of Stock Preferences for USA and China

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  • Zhidong Bai

    (KLASMOE and School of Mathematics and Statistics, Northeast Normal University, Department of Statistics and Applied Probability and Risk Management Institute, National University of Singapore)

  • Hua Li

    (Department of Statistics and Applied Probability, National University of Singapore)

  • Michael McAleer

    (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.)

  • Wing-Keung Wong

    (Department of Economics, Hong Kong Baptist University)

Abstract

We derive the limiting process of the stochastic dominance statistics for risk averters as well as for risk seekers when the underlying processes might be dependent or independent. We take account of the dependency of the partitions and propose a bootstrap method to decide the critical point. In addition, we illustrate the applicability of the stochastic dominance statistics for both risk averters and risk seekers to analyze the dominance relationship between the Chinese and US stock markets in the entire period as well as the sub-periods before and after the ¯nancial crises, including the internet bubble and the recent sub-prime crisis. The ¯ndings could be used to draw inferences on the preferences of risk averters and risk seekers in investing in the Chinese and US stock markets. The results also enable us to examine whether there is any arbitrage opportunity in these markets and whether these markets are e±cient and investors are rational.

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Bibliographic Info

Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 2012-13.

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Length: 42 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:ucm:doicae:1213

Note: Acknowledgments: This research is partially supported by Northeast Normal University, National University of Singapore, Research Grants Council of Hong Kong, and Hong Kong Baptist University. The third author wishes to acknowledge the ¯nancial support of the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science. The fourth author would like to thank Professors Robert B. Miller and Howard E. Thompson for their continuous guidance and encouragement.
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Keywords: Stochastic dominance; risk aversion; risk seeking; test statistic; hypothesis testing.;

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