Aggregate investor preferences and beliefs in stock market: A stochastic dominance analysis

Yi Fang

Journal of Empirical Finance, 2012, vol. 19, issue 4, 528-547

Abstract: This paper analyzes whether the market portfolio is efficiently related to benchmark portfolios formed on size, value, momentum and reversal with various utility theories by using stochastic dominance criteria. The results support the prospect theory including assumption of loss aversion at monthly and yearly horizons, which indicates the market utility is S-shaped, and steeper for losses than for gains. And, the findings do not provide convincing evidence for positive skewness preference. Therefore, it should probe into asset pricing model and financial puzzles by prospect theory preferences. It may thus be difficult for the market to benefit from the asset through its features on skewness or other higher order central moment. We also develop several bootstrap procedures with favorable properties in statistical size and power for testing stochastic dominance efficiency.

Keywords: Stock market efficiency; Bootstrap; Stochastic dominance; Prospect theory; Loss aversion; Skewness preference (search for similar items in EconPapers)
JEL-codes: C4 D4 D8 G1 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539812000357
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:19:y:2012:i:4:p:528-547

DOI: 10.1016/j.jempfin.2012.04.008

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().