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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 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 CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-744.

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Length: 34pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:tky:fseres:2010cf744

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Cited by:
  1. Broll, Udo & Wong, Wing-Keung & Wu, Mojia, 2013. "Banking Firm and Two-Moment Decision Making," MPRA Paper 51687, University Library of Munich, Germany.
  2. 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," KIER Working Papers 820, Kyoto University, Institute of Economic Research.
  3. 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.
  4. Ladislav Kristoufek & Miloslav Vosvrda, 2013. "Commodity futures and market efficiency," Papers 1309.1492, arXiv.org.
  5. 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.

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