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

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Lean, Hooi Hooi and McAleer, Michael and Wong, Wing-Keung (2013) Risk-averse and Risk-seeking Investor Preferences for Oil Spot and Futures. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 31, 2013, ] (Unpublished)

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Official URL: http://eprints.ucm.es/22728/


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Abstract

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.


Item Type:Working Paper or Technical Report
Additional Information:

JEL: C14, G12, G15.
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.

Uncontrolled Keywords:Stochastic dominance, Mean-variance, Risk averter, Risk seeker, Futures market, Spot market.
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2013
Number:31
ID Code:22728
Deposited On:05 Sep 2013 10:20
Last Modified:16 Feb 2016 10:26

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