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

30 Pages Posted: 18 Jan 2010

See all articles by Hooi Hooi Lean

Hooi Hooi Lean

Universiti Sains Malaysia

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Wing-Keung Wong

Asia University, Department of Finance

Date Written: January 15, 2010

Abstract

This paper examines the market efficiency of oil spot and futures prices by using both mean-variance (MV) and stochastic dominance (SD) approaches. As there is no evidence of any MV and SD relationship between oil spot and futures, we conclude: 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 for both the Brent and West Texas Intermediate crude oil markets. Our empirical findings are robust to each sub-period before and after the crises for different crises, and also to portfolio diversification.

Keywords: Stochastic dominance, risk averter, oil futures market, market efficiency

JEL Classification: C14, G12, G15

Suggested Citation

Lean, Hooi Hooi and McAleer, Michael and Wong, Wing-Keung, Market Efficiency of Oil Spot and Futures: A Mean-Variance and Stochastic Dominance Approach (January 15, 2010). Available at SSRN: https://ssrn.com/abstract=1537103 or http://dx.doi.org/10.2139/ssrn.1537103

Hooi Hooi Lean

Universiti Sains Malaysia ( email )

Economics Program
School of Social Sciences
USM, Penang 11800
Malaysia
604-6532663 (Phone)
604-6570918 (Fax)

HOME PAGE: http://www.soc.usm.my/LeanPages/index.html

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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