Stochastic dominance relationships between stock and stock index futures markets: International evidence

Zhuo Qiao*, Wing Keung WONG, Joseph K W FUNG

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    19 Citations (Scopus)


    In this paper, we first modify the stochastic dominance (SD) test for risk averters proposed by Davidson and Duclos (2000) to be the SD test for risk seekers. We then adopt both tests to examine the SD relationships between stock indices and their corresponding index futures for 10 countries. The sample contains data from 6 developed countries and 4 developing countries. The study proposes that there should be no SD relationship between spot and futures markets in developed financial markets in which arbitrage opportunities (both pure and quasi) are rare and short-lived. However, we expect that SD relationships could be found in emerging financial markets that have more impediments to arbitrage. Consistent with this conjecture, our study finds that there are no SD relationships between spot and futures markets in the mature market sample, implying that these markets could be efficient. However, for the emerging markets, spot dominates futures for risk averters, while futures dominate spot for risk seekers in the second- and third-order SD. These results indicate that there are potential gains in expected utilities for risk averters (seekers) if they switch their investment from futures (spot) to spot (futures) in the emerging markets.

    Original languageEnglish
    Pages (from-to)552-559
    Number of pages8
    JournalEconomic Modelling
    Publication statusPublished - Jul 2013

    Scopus Subject Areas

    • Economics and Econometrics

    User-Defined Keywords

    • Index futures
    • Risk averter
    • Risk seeker
    • Stochastic dominance
    • Stock


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