Abstract
This paper develops new financial theory to link the third-order stochastic dominance (TSD) for risk-averse and risk-seeking investors and provide illustration of application in risk management. We present some interesting new properties of TSD for risk-averse and risk-seeking investors. We show that the means of the assets being compared should be included in the definition of TSD for both investor types. We also derive the conditions on the variance order of two assets with equal means for both investor types and extend the second-order SD reversal result of Levy and Levy (Manag Sci 48(10):1334–1349, 2002) to TSD. We apply our results to analyze the investment behaviors on traditional stocks and internet stocks for both risk averters and risk seekers.
| Original language | English |
|---|---|
| Pages (from-to) | 108-132 |
| Number of pages | 25 |
| Journal | Risk Management |
| Volume | 22 |
| Issue number | 2 |
| Early online date | 16 Nov 2019 |
| DOIs | |
| Publication status | Published - Jun 2020 |
| Externally published | Yes |
Bibliographical note
The authors would also like to thank Sheung-Chi Chow and Zhenzhen Zhu in assisting us for the computation and in assisting us in the illustration. The fourth author would also like to thank Robert B. Miller, Kung Fu Ng, and Howard E. Thompson for their ongoing counseling and encouragement.Publisher Copyright:
© 2019, Springer Nature Limited.
Funding
Grants from City University of Hong Kong, Middlesex Business School, Beijing Normal University, Asia University, China Medical University Hospital, The Hang Seng University of Hong Kong, the Research Grants Council of Hong Kong (Project Number 12500915), and Ministry of Science and Technology (MOST, Project Numbers 106-2410-H-468-002 and 107-2410-H-468-002-MY3), Taiwan.
Keywords
- Expected-utility maximization
- Investment behaviors
- Risk aversion
- Risk-seeking
- Third-order stochastic dominance