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

  • Hooi Hooi Lean

    (Economics Program School of Social Sciences Universiti Sains Malaysia)

  • Michael McAleer

    (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.)

  • Wing-Keung Wong

    (Department of Economics, Hong Kong Baptist University)

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.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 2013-31.

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Length: 31 pages
Date of creation: 2013
Date of revision: Aug 2013
Handle: RePEc:ucm:doicae:1331
Note: The second author wishes to acknowledge the financial support of the Australian Research Council and the National Science Council, Taiwan. The third author would like to thank Robert B. Miller and Howard E. Thompson for their continuous guidance and encouragement, and to acknowledge the financial support from Hong Kong Baptist University and Research Grants Council (RGC) of Hong Kong.
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