Market Efficiency of Oil Spot and Futures: A Mean-Variance and Stochastic Dominance Approach
30 Pages Posted: 18 Jan 2010
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: Suggested Citation
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