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

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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 investor preferences for oil spot and futures based on mean-variance (MV) and stochastic dominance (SD). The mean-variance criterion cannot distinct the preferences of spot 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 Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 755.

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Length: 38pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:kyo:wpaper:755

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Keywords: Stochastic dominance; risk averter; risk seeker; futures market; spot market.;

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Citations

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Cited by:
  1. 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.
  2. Lean, H.H. & McAleer, M.J. & Wong, W-K., 2013. "Risk-averse and Risk-seeking Investor Preferences for Oil Spot and Futures," Econometric Institute Research Papers EI 2013-27, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  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. Broll, Udo & Wong, Wing-Keung & Wu, Mojia, 2013. "Banking Firm and Two-Moment Decision Making," MPRA Paper 51687, University Library of Munich, Germany.

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