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

  • 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

    (Erasmus University Rotterdam,Tinbergen Institute,Kyoto University,Complutense University of Madrid)

  • Wing-Keung Wong

    (Department of Economics Hong Kong Baptist University)

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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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP820.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 820.

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Date of creation: Jun 2012
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Handle: RePEc:kyo:wpaper:820
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  1. Ma, Chenghu & Wong, Wing-Keung, 2010. "Stochastic dominance and risk measure: A decision-theoretic foundation for VaR and C-VaR," European Journal of Operational Research, Elsevier, vol. 207(2), pages 927-935, December.
  2. Wing-Keung Wong & Chenghu Ma, 2005. "Preferences over Meyer’s Location-Scale Family," Departmental Working Papers wp0506, National University of Singapore, Department of Economics.
  3. Fong, Wai Mun & Wong, Wing Keung & Lean, Hooi Hooi, 2005. "International momentum strategies: a stochastic dominance approach," Journal of Financial Markets, Elsevier, vol. 8(1), pages 89-109, February.
  4. Egozcue, Martin & Wong, Wing-Keung, 2010. "Gains from diversification on convex combinations: A majorization and stochastic dominance approach," European Journal of Operational Research, Elsevier, vol. 200(3), pages 893-900, February.
  5. Russell Davidson & Jean-Yves Duclos, 2000. "Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality," Econometrica, Econometric Society, vol. 68(6), pages 1435-1464, November.
  6. Egozcue, Martín & García, Luis Fuentes & Wong, Wing-Keung & Zitikis, Ricardas, 2011. "Do investors like to diversify? A study of Markowitz preferences," European Journal of Operational Research, Elsevier, vol. 215(1), pages 188-193, November.
  7. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  8. Lam, Kin & Liu, Taisheng & Wong, Wing-Keung, 2010. "A pseudo-Bayesian model in financial decision making with implications to market volatility, under- and overreaction," European Journal of Operational Research, Elsevier, vol. 203(1), pages 166-175, May.
  9. Oliver Linton & Esfandiar Maasoumi & Yoon-Jae Whang, 2005. "Consistent Testing for Stochastic Dominance under General Sampling Schemes," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 735-765.
  10. Anderson, Gordon, 2004. "Toward an empirical analysis of polarization," Journal of Econometrics, Elsevier, vol. 122(1), pages 1-26, September.
  11. Feldstein, Martin S, 1969. "Mean-Variance Analysis in the Theory of Liquidity Preference and Portfolio Selection," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 5-12, January.
  12. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  13. Lean, H.H. & McAleer, M.J. & Wong, W.K., 2010. "Investor preferences for oil spot and futures based on mean-variance and stochastic dominance," Econometric Institute Research Papers EI 2010-37, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  14. Chakravarty, Sugato & Sarkar, Asani & Wu, Lifan, 1998. "Information asymmetry, market segmentation and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 325-356, December.
  15. Garry F. Barrett & Stephen G. Donald, 2003. "Consistent Tests for Stochastic Dominance," Econometrica, Econometric Society, vol. 71(1), pages 71-104, January.
  16. Dominic Gasbarro & Wing-Keung Wong & J. Kenton Zumwalt, 2007. "Stochastic Dominance Analysis of iShares," Finance Working Papers 21919, East Asian Bureau of Economic Research.
  17. Wong, Wing-Keung & Li, Chi-Kwong, 1999. "A note on convex stochastic dominance," Economics Letters, Elsevier, vol. 62(3), pages 293-300, March.
  18. Schechtman, Edna & Shelef, Amit & Yitzhaki, Shlomo & Zitikis, Ričardas, 2008. "Testing Hypotheses About Absolute Concentration Curves And Marginal Conditional Stochastic Dominance," Econometric Theory, Cambridge University Press, vol. 24(04), pages 1044-1062, August.
  19. Fong, Wai Mun & Lean, Hooi Hooi & Wong, Wing Keung, 2008. "Stochastic dominance and behavior towards risk: The market for Internet stocks," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 194-208, October.
  20. Thierry Post & Haim Levy, 2005. "Does Risk Seeking Drive Stock Prices? A Stochastic Dominance Analysis of Aggregate Investor Preferences and Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 925-953.
  21. Wing-Keung Wong, 2007. "Stochastic Dominance and Mean-Variance Measures of Profit and Loss for Business Planning and Investment," SCAPE Policy Research Working Paper Series 0705, National University of Singapore, Department of Economics, SCAPE.
  22. Lean, Hooi Hooi & McAleer, Michael & Wong, Wing-Keung, 2010. "Market efficiency of oil spot and futures: A mean-variance and stochastic dominance approach," Energy Economics, Elsevier, vol. 32(5), pages 979-986, September.
  23. repec:dgr:uvatin:20020070 is not listed on IDEAS
  24. Bishop, John A & Formby, John P & Thistle, Paul D, 1992. "Convergence of the South and Non-South Income Distributions, 1969-1979," American Economic Review, American Economic Association, vol. 82(1), pages 262-72, March.
  25. Zhidong Bai & Hua Li & Huixia Liu & Wing‐Keung Wong, 2011. "Test statistics for prospect and Markowitz stochastic dominances with applications," Econometrics Journal, Royal Economic Society, vol. 14(2), pages 278-303, 07.
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