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Investor Preferences for Oil Spot and Futures Based on Mean-Variance and Stochastic Dominance

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  • Hooi Hooi Lean

    (School of Social Sciences, Universiti Sains Malaysia)

  • Michael McAleer

    (Erasmus School of Economics, Erasmus University Rotterdam, Tinbergen Institute and Department of Economics and Finance, University of Canterbury)

  • Wing-Keung Wong

    (Department of Economics, Hong Kong Baptist University)

Abstract

This paper examines investor preferences for oil spot and futures based on mean-variance (MV) and stochastic dominance (SD). The mean-variance criterion cannot distinct the preferences ofspot and market whereas SD tests leads to the conclusion that spot dominates futures in the downside risk while futures dominate spot in the upside profit. It is also found that risk-averse investors prefer investing in the spot index, whereas risk seekers are attracted to the futures index to maximize their expected utilities. In addition, the SD results suggest that there is no arbitrage opportunity between these two markets. Market efficiency and market rationality are likely to hold in the oil spot and futures markets.

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Bibliographic Info

Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-220.

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Length: 34 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:cfi:fseres:cf220

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Cited by:
  1. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2013. "Risk-averse and Risk-seeking Investor Preferences for Oil Spot and Futures," Documentos de Trabajo del ICAE 2013-31, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico, revised Aug 2013.
  2. Broll, Udo & Wong, Wing-Keung & Wu, Mojia, 2013. "Banking Firm and Two-Moment Decision Making," MPRA Paper 51687, University Library of Munich, Germany.
  3. Kristoufek, Ladislav & Vosvrda, Miloslav, 2014. "Commodity futures and market efficiency," Energy Economics, Elsevier, vol. 42(C), pages 50-57.
  4. Guorui Bian & Michael McAleer & Wing-Keung Wong, 2013. "Robust Estimation and Forecasting of the Capital Asset Pricing Model," Tinbergen Institute Discussion Papers 13-036/III, Tinbergen Institute.
  5. Zhidong Bai & Hua Li & Michael McAleer & Wing-Keung Wong, 2012. "Stochastic Dominance Statistics for Risk Averters and Risk Seekers: An Analysis of Stock Preferences for USA and China," Documentos de Trabajo del ICAE 2012-13, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.

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