This article considers four utility functions—concave, convex, S-shaped, and reverseS-shaped—to analyze the behavior of different types of investors on the Taiwan stockindex and its corresponding index futures. Using stochastic dominance (SD) rules, weshow that the existence of all four investor types is plausible. Risk averters prefer spotto futures, whereas risk seekers prefer futures to spot. Investors with S-shaped utilityfunctions 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 marketscan exist when only risk averters are present, but futures can dominate spot only if thereis some risk-seeking behavior. These results are robust with respect to subperiods, spotreturns including dividends, and diversication. (JEL C14, G12, G15)
