We derive the limiting process of stochastic dominance statistics for risk averters as well as for risk seekers when the underlying processes are 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 analyse the dominance relationship between the Chinese and US stock markets in the entire period as well as the sub-periods before and after the crises, including the internet bubble and the recent sub-prime crisis. The findings 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 are arbitrage opportunities in these markets, and whether these markets are efficient and investors are rational.

Hypothesis testing, Risk aversion, Risk-seeking, Stochastic dominance, Test statistic
dx.doi.org/10.1080/14697688.2014.943273, hdl.handle.net/1765/86429
Quantitative Finance
Erasmus School of Economics

Bai, Z, Li, H, McAleer, M.J, & Wong, W.-K. (2015). Stochastic dominance statistics for risk averters and risk seekers: an analysis of stock preferences for USA and China. Quantitative Finance, 15(5), 889–900. doi:10.1080/14697688.2014.943273