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

Author Info

  • 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)

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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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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Keywords: Stochastic dominance; risk aversion; risk seeking; test statistic; hypothesis testing.;

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Find related papers by JEL classification:
  • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
  • G1 - Financial Economics - - General Financial Markets
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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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.
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  23. repec:dgr:uvatin:20020070 is not listed on IDEAS
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Cited by:

  1. Fathi Abid & Pui Lam Leung & Mourad Mroua & Wing Keung Wong, 2014. "International Diversification Versus Domestic Diversification: Mean-Variance Portfolio Optimization and Stochastic Dominance Approaches," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 7(2), pages 45-66, May.

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