Theories of risk: Testing investor behavior on the taiwan stock and stock index futures markets

Ephraim Clark, Zhuo Qiao*, Wing Keung Wong

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

24 Citations (Scopus)


This article considers four utility functions—concave, convex, S-shaped, and reverse S-shaped—to analyze the behavior of different types of investors on the Taiwan stock index and its corresponding index futures. Using stochastic dominance (SD) rules, we show that the existence of all four investor types is plausible. Risk averters prefer spot to futures, whereas risk seekers prefer futures to spot. Investors with S-shaped utility functions prefer spot (futures) to futures (spot) when markets move upward (downward). Investors with reverse S-shaped utility functions prefer futures (spot) to spot (futures) when markets move upward (downward). We show that both spot and futures markets can exist when only risk averters are present, but futures can dominate spot only if there is some risk-seeking behavior. These results are robust with respect to subperiods, spot returns including dividends, and diversification. (JEL C14, G12, G15)

Original languageEnglish
Pages (from-to)907-924
Number of pages18
JournalEconomic Inquiry
Issue number2
Early online date28 Oct 2015
Publication statusPublished - Apr 2016

Scopus Subject Areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics


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