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

Author

Listed:
  • 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.

Suggested Citation

  • Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2010. "Market Efficiency of Oil Spot and Futures: A Mean-Variance and Stochastic Dominance Approach," KIER Working Papers 718, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:718
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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