Stochastic dominance approach of analysis for stock market valuation of financial consolidation in Taiwan

To examine whether stock market values financial consolidation in Taiwan since 2002, this paper compares the stock market performance of financial-holding-company banks (FHC-bank) with independent banks using Taiwanʹs daily data from 2003 to 2009. While the ultimate goal of a typical public-traded bank is to maximize its stockholderʹs wealth, based on stock returns distribution, we employ stochastic dominance (SD) approach to examine relative performance between FHC-banks versus independent banks. The advantage of SD approach is that it lightens the problem that can arise if the asset returns are not normally distributed because it utilizes the whole distribution of returns. Since SD is nonparametric, SD tests do not require any specific assumptions on investorsʹ utility function or the returns distribution of asset and thus avoid the joint test problem inherent in the standard approach. Most of our evidence shows that there is little dominance in stock returns of FHC-banks relative to independent banks. Thus, Taiwanʹs stock market does not value financial consolidation during our sample period.