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

Author

Listed:
  • 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.

Suggested Citation

  • Zhidong Bai & Hua Li & Michael McAleer & Wing-Keung Wong, 2012. "Stochastic Dominance Statistics for Risk Averters and Risk Seekers: An Analysis of Stock Preferences for USA and China," KIER Working Papers 820, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:820
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    More about this item

    Keywords

    Stochastic dominance; risk aversion; risk seeking; test statistic; hypothesis testing.;
    All these keywords.

    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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