STOCHASTIC DOMINANCE AND BEHAVIOR TOWARDS RISK: THE MARKET FOR ISHARES

Dominic Gasbarro (), Wing-Keung Wong and J. Kenton Zumwalt ()
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Dominic Gasbarro: Murdoch Business School, Murdoch University, 90 South Street, Murdoch 6150, Australia
J. Kenton Zumwalt: Department of Finance and Real Estate, Colorado State University, Fort Collins, Colorado 80523, USA

Annals of Financial Economics (AFE), 2012, vol. 07, issue 01, 1-20

Abstract: Prospect theory suggests that risk seeking can occur when investors face losses and thus an S-shaped utility function can be useful in explaining investor behavior. Using stochastic dominance procedures, Post and Levy (2015) find evidence of reverse S-shaped utility functions. This is consistent with investors exhibiting risk-seeking tendencies in bull markets and risk aversion in bear markets. We use both ascending and descending stochastic dominance procedures to test for risk-averse and risk-seeking behavior. By partitioning iShares' return distributions into negative and positive return regions, we find evidence of all four utility functions: concave, convex, S-shaped and reverse S-shaped.

Keywords: Ascending stochastic dominance; descending stochastic dominance; risk aversion; risk seeking; prospect theory; behavioral finance; JEL Classifications: G11; JEL Classifications: G15 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (24)

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DOI: 10.1142/S2010495212500054

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