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

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Author Info

  • Hooi Hooi Lean

    (School of Social Sciences, Universiti Sains Malaysia)

  • Michael McAleer

    (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University)

  • Wing-Keung Wong

    (Department of Economics, Hong Kong Baptist University)

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 of 1989-2008, we find no evidence of any MV and SD relationship 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. Our 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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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 718.

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Length: 32pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:kyo:wpaper:718

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

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