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

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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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1022.pdf
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Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 10/22.

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Length: 30 pages
Date of creation: 01 May 2010
Date of revision:
Handle: RePEc:cbt:econwp:10/22
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