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

Article


Clark, E., Qiao, Z. and Wong, W. 2016. Theories of risk: testing investor behaviour on the Taiwan stock and stock index futures markets. Economic Inquiry. 54 (2), pp. 907-924. https://doi.org/10.1111/ecin.12288
TypeArticle
TitleTheories of risk: testing investor behaviour on the Taiwan stock and stock index futures markets
AuthorsClark, E., Qiao, Z. and Wong, W.
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.

Keywordsstochastic dominance; risk aversion; risk seeking; prospect theory; behavioral economics; stock index futures.
PublisherWileyBlackwell
JournalEconomic Inquiry
ISSN0095-2583
Electronic1465-7295
Publication dates
Online28 Oct 2015
Print23 Feb 2016
Publication process dates
Deposited23 Apr 2015
Submitted31 Dec 2012
Accepted25 Feb 2015
Output statusPublished
Publisher's version
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Copyright Statement

© 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.

Digital Object Identifier (DOI)https://doi.org/10.1111/ecin.12288
LanguageEnglish
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