Theories of risk: testing investor behaviour on the Taiwan stock and stock index futures markets

Clark, Ephraim A., Qiao, Zhuo and Wong, Wing-Keung (2016) Theories of risk: testing investor behaviour on the Taiwan stock and stock index futures markets. Economic Inquiry, 54 (2). pp. 907-924. ISSN 0095-2583 (doi:10.1111/ecin.12288)

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Abstract

This paper considers four utility functions - concave, convex, S-shaped, and reverse S-shaped - to analyze the behavior of different types of investors on the Taiwan stock index and its corresponding index futures. Using stochastic dominance (SD) rules, we show that the existence of all four investor types is plausible. Risk averters prefer spot to futures, whereas risk seekers prefer futures to spot. Investors with S-shaped utility functions prefer spot (futures) to futures (spot) when markets move upward (downward). Investors with reverse S-shaped utility functions prefer futures (spot) to spot (futures) when markets move upward (downward). We show that both spot and futures markets can exist when only risk averters are present, but futures can dominate spot only if there is some risk seeking behavior. These results are robust with respect to sub-periods, spot returns including dividends and diversification.

Item Type: Article
Keywords (uncontrolled): stochastic dominance; risk aversion; risk seeking; prospect theory; behavioral economics; stock index futures.
Research Areas: A. > Business School > Accounting and Finance
Item ID: 14736
Notes on copyright: Gold Open Access. Full text: © 2015 The Authors. Economic Inquiry published by Wiley Periodicals, Inc. on behalf of Western Economic Association International.This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
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Depositing User: Bernadett Dunn
Date Deposited: 23 Apr 2015 09:00
Last Modified: 31 May 2019 22:43
URI: https://eprints.mdx.ac.uk/id/eprint/14736

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