Investors' preference towards risk: Evidence from the Taiwan stock and stock index futures markets

We apply the stochastic dominance (SD) tests proposed by Linton (2005) and Davidson and Duclos (2000) for risk averters and risk seekers to examine investors' preferences with respect to the Taiwan stock index and its corresponding index futures. We find that there is no first-order SD relationship between Taiwan spot and futures. However, for second- and third-order SD, we find that spot dominates futures for risk averters whereas futures dominates spot for risk seekers. The implication is that to maximize their expected utilities, risk averters prefer to buy stocks, whereas risk seekers prefer long index futures.