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Market Efficiency of Oil Spot and Futures: A Mean-Variance and Stochastic Dominance Approach

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  • Hooi Hooi Lean
  • Michael McAleer

    ()
    (University of Canterbury)

  • Wing-Keung Wong

Abstract

This paper examines the market efficiency of oil spot and futures prices by using both mean-variance (MV) and stochastic dominance (SD) approaches. Based on the West Texas Intermediate crude oil data for the sample period 1989-2008, we find no evidence of any MV and SD relationships between oil spot and futures indices. This infers that there is no arbitrage opportunity between these two markets, spot and futures do not dominate one another, investors are indifferent to investing in spot or futures, and the spot and futures oil markets are efficient and rational. The empirical findings are robust to each sub-period before and after the crises for different crises, and also to portfolio diversification.

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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1018.pdf
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Bibliographic Info

Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 10/18.

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Length: 27 pages
Date of creation: 01 Apr 2010
Date of revision:
Handle: RePEc:cbt:econwp:10/18

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Keywords: Stochastic dominance; risk averter; oil futures market; market efficiency;

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