IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Risk-averse and Risk-seeking Investor Preferences for Oil Spot and Futures

  • Lean, H.H.
  • McAleer, M.J.
  • Wong, W-K.

This paper examines risk-averse and risk-seeking investor preferences for oil spot and futures prices by using the mean-variance (MV) criterion and stochastic dominance (SD) approach. The MV findings cannot distinguish between the preferences of spot and futures markets. However, the SD tests show that spot dominates futures in the downside risk, while futures dominate spot in the upside profit. On the other hand, the SD findings suggest that spot dominates futures in downside risk, while futures dominate spot in upside profit. Risk-averse investors prefer investing in the spot index. Risk seekers are attracted to the futures index to maximize their expected utility but not expected wealth in the entire period, as well as for both the OPEC and Iraq War sub-periods. The SD findings show that there is no arbitrage opportunity between the spot and futures markets, and these markets are not rejected as being efficient.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://repub.eur.nl/pub/41467/EI2013-27.pdf
Download Restriction: no

Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 2013-27.

as
in new window

Length:
Date of creation: 01 Aug 2013
Date of revision:
Handle: RePEc:ems:eureir:41467
Contact details of provider: Postal: Postbus 1738, 3000 DR Rotterdam
Phone: 31 10 4081111
Web page: http://www.eur.nl/ese

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Hammoudeh, Shawkat & Li, Huimin & Jeon, Bang, 2003. "Causality and volatility spillovers among petroleum prices of WTI, gasoline and heating oil in different locations," The North American Journal of Economics and Finance, Elsevier, vol. 14(1), pages 89-114, March.
  2. Bishop, John A & Formby, John P & Thistle, Paul D, 1992. "Convergence of the South and Non-South Income Distributions, 1969-1979," American Economic Review, American Economic Association, vol. 82(1), pages 262-72, March.
  3. S. Gurcan Gulen, 1999. "Regionalization in the World Crude Oil Market: Further Evidence," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 125-139.
  4. Kang, Sang Hoon & Kang, Sang-Mok & Yoon, Seong-Min, 2009. "Forecasting volatility of crude oil markets," Energy Economics, Elsevier, vol. 31(1), pages 119-125, January.
  5. Berry Wilson & Reena Aggarwal & Carla Inclan, 1996. "Detecting volatility changes across the oil sector," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(3), pages 313-330, 05.
  6. Haim Levy, 2004. "Prospect Theory and Mean-Variance Analysis," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 1015-1041.
  7. Linton, Oliver & Maasoumi, Esfandiar & Whang, Yoon-Jae, 2003. "Consistent Testing for Stochastic Dominance under General Sampling Schemes," SFB 373 Discussion Papers 2003,31, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  8. Thierry Post & Haim Levy, 2005. "Does Risk Seeking Drive Stock Prices? A Stochastic Dominance Analysis of Aggregate Investor Preferences and Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 925-953.
  9. Wong, Wing-Keung & Li, Chi-Kwong, 1999. "A note on convex stochastic dominance," Economics Letters, Elsevier, vol. 62(3), pages 293-300, March.
  10. Mohamed AROURI & Amine LAHIANI & D.-K. NGUYEN, 2010. "Forecasting the Conditional Volatility of Oil Spot andFutures Prices with Structural Breaksand Long Memory Models," Working Papers 661, Orleans Economic Laboratorys, University of Orleans.
  11. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  12. Zhuo Qiao & Ephraim Clark & Wing-Keung Wong, 2014. "Investors’ preference towards risk: evidence from the Taiwan stock and stock index futures markets," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(1), pages 251-274, 03.
  13. Zhidong Bai & Hua Li & Huixia Liu & Wing‐Keung Wong, 2011. "Test statistics for prospect and Markowitz stochastic dominances with applications," Econometrics Journal, Royal Economic Society, vol. 14(2), pages 278-303, 07.
  14. Wong, Wing-Keung & Phoon, Kok Fai & Lean, Hooi Hooi, 2008. "Stochastic dominance analysis of Asian hedge funds," Pacific-Basin Finance Journal, Elsevier, vol. 16(3), pages 204-223, June.
  15. Russell Davidson & Jean-Yves Duclos, 2000. "Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality," Econometrica, Econometric Society, vol. 68(6), pages 1435-1464, November.
  16. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  17. anonymous, 1996. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Sep.
  18. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2010. "Market Efficiency of Oil Spot and Futures: A Stochastic Dominance Approach," CIRJE F-Series CIRJE-F-705, CIRJE, Faculty of Economics, University of Tokyo.
  19. Thomas V. Schwarz & Andrew C. Szakmary, 1994. "Price discovery in petroleum markets: Arbitrage, cointegration, and the time interval of analysis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(2), pages 147-167, 04.
  20. Wing-Keung Wong & Chenghu Ma, 2008. "Preferences over location-scale family," Economic Theory, Springer, vol. 37(1), pages 119-146, October.
  21. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2011. "Investor Preferences for Oil Spot and Futures based on Mean-Variance and Stochastic Dominance," KIER Working Papers 755, Kyoto University, Institute of Economic Research.
  22. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2010. "Market Efficiency of Oil Spot and Futures: A Mean-Variance and Stochastic Dominance Approach," Working Papers in Economics 10/18, University of Canterbury, Department of Economics and Finance.
  23. Dominic Gasbarro & Wing-Keung Wong & J. Kenton Zumwalt, 2007. "Stochastic Dominance Analysis of iShares," The European Journal of Finance, Taylor & Francis Journals, vol. 13(1), pages 89-101.
  24. Egozcue, Martín & García, Luis Fuentes & Wong, Wing-Keung & Zitikis, Ricardas, 2011. "Do investors like to diversify? A study of Markowitz preferences," European Journal of Operational Research, Elsevier, vol. 215(1), pages 188-193, November.
  25. Bekiros, Stelios D. & Diks, Cees G.H., 2008. "The relationship between crude oil spot and futures prices: Cointegration, linear and nonlinear causality," Energy Economics, Elsevier, vol. 30(5), pages 2673-2685, September.
  26. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  27. anonymous, 1996. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue May.
  28. Jensen, Michael C, 1969. "Risk, The Pricing of Capital Assets, and the Evaluation of Investment Portfolios," The Journal of Business, University of Chicago Press, vol. 42(2), pages 167-247, April.
  29. Garry F. Barrett & Stephen G. Donald, 2003. "Consistent Tests for Stochastic Dominance," Econometrica, Econometric Society, vol. 71(1), pages 71-104, January.
  30. anonymous, 1996. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Mar.
  31. Anonymous, 1996. "Contents of Agricultural Economics, Vol. 14," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 14(3), August.
  32. Wai Mun Fong & Kim Hock See, 2003. "Basis variations and regime shifts in the oil futures market," The European Journal of Finance, Taylor & Francis Journals, vol. 9(5), pages 499-513.
  33. anonymous, 1996. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Aug.
  34. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  35. Chan, Chia-Ying & de Peretti, Christian & Qiao, Zhuo & Wong, Wing-Keung, 2012. "Empirical test of the efficiency of the UK covered warrants market: Stochastic dominance and likelihood ratio test approach," Journal of Empirical Finance, Elsevier, vol. 19(1), pages 162-174.
  36. anonymous, 1996. "Economic forces shaping the rural heartland," Monograph, Federal Reserve Bank of Kansas City, number 1996efstr, July 7.
  37. Y.K. Tse & Xibin Zhang, 2003. "A Monte Carlo Investigation of Some Tests for Stochastic Dominance," Monash Econometrics and Business Statistics Working Papers 7/03, Monash University, Department of Econometrics and Business Statistics.
  38. anonymous, 1996. "Global linkages to the Midwest economy," Assessing the Midwest Economy 6, Federal Reserve Bank of Chicago.
  39. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  40. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
  41. William L. Beedles, 1979. "Return, Dispersion, And Skewness: Synthesis And Investment Strategy," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 2(1), pages 71-80, 03.
  42. Wing-Keung Wong, 2007. "Stochastic Dominance and Mean-Variance Measures of Profit and Loss for Business Planning and Investment," Finance Working Papers 21922, East Asian Bureau of Economic Research.
  43. anonymous, 1996. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Dec.
  44. Cumby, Robert E & Glen, Jack D, 1990. " Evaluating the Performance of International Mutual Funds," Journal of Finance, American Finance Association, vol. 45(2), pages 497-521, June.
  45. Jarrow, Robert, 1986. " The Relationship between Arbitrage and First Order Stochastic Dominance," Journal of Finance, American Finance Association, vol. 41(4), pages 915-21, September.
  46. Haim Falk & Haim Levy, 1989. "Market Reaction to Quarterly Earnings' Announcements: A Stochastic Dominance Based Test of Market Efficiency," Management Science, INFORMS, vol. 35(4), pages 425-446, April.
  47. Kaur, Amarjot & Prakasa Rao, B.L.S. & Singh, Harshinder, 1994. "Testing for Second-Order Stochastic Dominance of Two Distributions," Econometric Theory, Cambridge University Press, vol. 10(05), pages 849-866, December.
  48. Matthew R. Morey & Richard C. Morey, 2000. "An Analytical Confidence Interval for the Treynor Index: Formula, Conditions and Properties," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(1&2), pages 127-154.
  49. Anderson, Gordon, 1996. "Nonparametric Tests of Stochastic Dominance in Income Distributions," Econometrica, Econometric Society, vol. 64(5), pages 1183-93, September.
  50. anonymous, 1996. "The changing rural economy of the Midwest," Assessing the Midwest Economy 3, Federal Reserve Bank of Chicago.
  51. Lin, Sharon Xiaowen & Tamvakis, Michael N., 2001. "Spillover effects in energy futures markets," Energy Economics, Elsevier, vol. 23(1), pages 43-56, January.
  52. anonymous, 1996. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Jul.
  53. John S. Hammond, III, 1974. "Simplifying the Choice between Uncertain Prospects Where Preference is Nonlinear," Management Science, INFORMS, vol. 20(7), pages 1047-1072, March.
  54. anonymous, 1996. "The Midwest economy: structure and performance," Assessing the Midwest Economy 2, Federal Reserve Bank of Chicago.
  55. Fong, Wai Mun & Lean, Hooi Hooi & Wong, Wing Keung, 2008. "Stochastic dominance and behavior towards risk: The market for Internet stocks," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 194-208, October.
  56. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  57. Anthony E. Bopp & Scott Sitzer, 1987. "Are petroleum futures prices good predictors of cash value?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 7(6), pages 705-719, December.
  58. Hanoch, G & Levy, Haim, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Wiley Blackwell, vol. 36(107), pages 335-46, July.
  59. Anderson, Kym, 1996. "Economic Development, Trade, and the Environment," 1996 Conference (40th), February 11-16, 1996, Melbourne, Australia 149780, Australian Agricultural and Resource Economics Society.
  60. anonymous, 1996. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Jan.
  61. Undp, 1996. "HDR 1996 - Economic Growth and Human Development," Human Development Report (1990 to present), Human Development Report Office (HDRO), United Nations Development Programme (UNDP), number hdr1996, June.
  62. Anonymous, 1996. "Contents of Agricultural Economics, Vol. 13," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 13(3), February.
  63. William J. Crowder & Anas Hamed, 1993. "A cointegration test for oil futures market efficiency," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(8), pages 933-941, December.
  64. Fong, Wai Mun & Wong, Wing Keung & Lean, Hooi Hooi, 2005. "International momentum strategies: a stochastic dominance approach," Journal of Financial Markets, Elsevier, vol. 8(1), pages 89-109, February.
  65. Lean Hooi Hooi & Wong Wing Keung & Russell Smyth, 2005. "Revisiting Calender Anomolies in Asian Stock Markets Using a Stochastic Dominance Approach," Monash Economics Working Papers 16/05, Monash University, Department of Economics.
  66. Moshe Leshno & Haim Levy, 2002. "Preferred by "All" and Preferred by "Most" Decision Makers: Almost Stochastic Dominance," Management Science, INFORMS, vol. 48(8), pages 1074-1085, August.
  67. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
  68. Tesfatsion, Leigh, 1976. "Stochastic Dominance and the Maximization of Expected Utility," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 301-15, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ems:eureir:41467. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RePub)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.