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

Lean, Hooi Hooi; McAleer, Michael; Wong, Wing-Keung

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

Download

1331.pdf (145.29 KB)

Publication date

2013

Authors

Lean, Hooi Hooi

McAleer, Michael

Wong, Wing-Keung

Citations

Exportar

URI

https://hdl.handle.net/20.500.14352/41502

Citation

Anderson, G. (1996). Nonparametric tests of stochastic dominance in income distributions. Econometrica,64, 1183-1193. Arouri, M.E.H., Lahiani, A., Levy, A., Nguyen, D.K. (2012). Forecasting the conditional volatility of oil spot and futures prices with structural breaks and long memory models. Energy Economics, 34, 283-293. Bai, Z. D., Hui, Y.C. Wong, W.K. and Zitikis, R. (2012). Evaluating Prospect Performance: making a Case for a Non-asymptotic UMPU test. Journal of Financial Econometrics, 10(4), 703-732. Bai, Z., Li, H., Liu, H., Wong, W.K. (2011). Test Statistics for Prospect and Markowitz Stochastic Dominances with Applications. Econometrics Journal, 14(2), 278-303 Barrett, G., Donald, S. (2003). Consistent tests for stochastic dominance. Econometrica, 71, 71-104. Beedles, W.L. (1979). Return, dispersion and skewness: synthesis and investment strategy. Journal of Financial Research, 2, 71-80. Bekiros, S.D., Diks, C.G.H. (2008). The Relationship between Crude Oil Spot and Futures Prices: Cointegration, Linear and Nonlinear Causality. Energy Economics, 30(5), 2673-2685. Bishop, J.A., Formly, J.P., Thistle, P.D. (1992). Convergence of the South and non-South income distributions. American Economic Review, 82, 262-272. Bopp, A.E., Sitzer, S. (1987). Are petroleum futures prices good predictors of cash value? Journal of Futures Markets, 7, 705-719. Broll, U., Egozcue, M., Wong, W.K., and Zitikis, R. (2010). Prospect theory, indifference curves, and hedging risks. Applied Mathematics Research Express, 2, 142-153. Chan, C.Y., Christian de Peretti, C., Qiao, Z., Wong, W.K. (2012). Empirical Test of the Efficiency of UK Covered Warrants Market: Stochastic Dominance and Likelihood Ratio Test Approach. Journal of Empirical Finance, 19(1), 162-174. Crowder, W.J., Hamid, A. (1993). A co-integration test for oil futures market efficiency. Journal of Futures Markets, 13, 933-941. Cumby, R.E., Glen, J.D. (1990). Evaluating the performance of international mutual funds. Journal of Finance, 45(2), 497-521. Davidson, R., Duclos, J-Y. (2000). Statistical inference for stochastic dominance and for the measurement of poverty and inequality. Econometrica, 68, 1435-1464. Egozcue, M., Fuentes García, L., Wong, W.K., and Zitikis, R. (2011), Do investors like to diversify? A study of Markowitz preferences, European Journal of Operational Research, 215(1), 188-193. Falk, H., Levy, H. (1989). Market reaction to quarterly earnings' announcements: A stochastic dominance based test of market efficiency. Management Science, 35, 425-446. Fishburn, P.C. (1964). Decision and Value Theory, New York. Fong, W.M., Lean, H.H., Wong, W.K. (2008). Stochastic dominance and behavior towards risk: the market for internet stocks. Journal of Economic Behavior and Organization, 68(1), 194-208. Fong, W.M., See, K.H. (2003). Basis variations and regime shifts in the oil futures market. The European Journal of Finance, 9, 499-513. Fong, W.M., Wong, W.K., Lean, H.H. (2005). International momentum strategies: A stochastic dominance approach. Journal of Financial Markets, 8, 89-109. Friedman, M., Savage, L.J. (1948), The Utility Analysis of Choices Involving Risk. Journal of Political Economy, 56, 279-304. Gasbarro, D., Wong, W.K., Zumwalt, J.K. (2007). Stochastic dominance analysis of iShares. European Journal of Finance, 13, 89-101. Guo, X., Zhu, X.H., Wong, W.K., Zhu, L.X. (2013). A Note on Almost Stochastic Dominance. Economics Letters, forthcoming. Gulen, S.G., (1999). Regionalization in world crude oil markets: further evidence. Energy Journal, 20, 125-139. Hadar J., Russell, W.R. (1969). Rules for ordering uncertain prospects. American Economic Review, 59, 25-34. Hammond, J.S., (1974). Simplifying the choice between uncertain prospects where preference is nonlinear. Management Science, 20(7), 1047-1072. Hammoudeh, S., Li, H., Jeon, B. (2003). Causality and volatility spillovers among petroleum prices of WTI, gasoline and heating oil in different locations. North American Journal of Economics and Finance, 14, 89-114. Hanoch, G., Levy, H. (1969). The efficiency analysis of choices involving risk. Review of Economic studies, 36, 335-346. Jarrow, R. (1986). The relationship between arbitrage and first order stochastic dominance. Journal of Finance, 41, 915-921. Jensen, M.C. (1969). Risk, the pricing of capital assets and the evaluation of investment portfolios. Journal of Business, 42, 167-247. Kahneman, D., Tversky, A. (1979). Prospect theory of decisions under risk. Econometrica, 47(2), 263-291. Kang, S.H., Kang, S.M. and Yoon, S.M. (2009). Forecasting volatility of crude oil markets. Energy Economics, 31, 119-125. Kaur, A., Rao, B.L.S.P., Singh, H. (1994). Testing for second order stochastic dominance of two distributions. Econometric Theory, 10, 849-866. Klecan, L., McFadden, R., McFadden, D. (1991). A robust test for stochastic dominance. Working Paper, MIT & Cornerstone Research. Lean, H.H., McAleer, M., Wong, W.K. (2010). Market efficiency of oil spot and futures: A mean-variance and stochastic dominance approach. Energy Economics, 32, 979-986. Lean, H.H., Smyth, R., Wong, W.K. (2007). Revisiting calendar anomalies in Asian stock markets using a stochastic dominance approach. Journal of Multinational Financial Management, 17(2), 125-141. Lean, H.H., Wong, W.K., Zhang, X. (2008). Size and Power of Some Stochastic Dominance Tests: A Monte Carlo Study. Mathematics and Computers in Simulation, 79, 30-48. Leshno, M. and H. Levy. (2002). Preferred by “All” and preferred by “Most” decision makers: Almost stochastic dominance. Management Science, 48, 1074-1085. Leung, P.L., Wong, W.K. (2008). On Testing the Equality of the Multiple Sharpe Ratios, with Application on the Evaluation of IShares. Journal of Risk, 10(3), 1-16. Levy, H., Levy, M. (2004). Prospect theory and mean-variance analysis. Review of Financial Studies, 17(4), 1015-1041. Li, C.K., Wong, W.K. (1999). A note on stochastic dominance for risk averters and risk takers. RAIRO Recherche Operationnelle, 33, 509-524. Lin, X.S., Tamvakis, M.N. (2001). Spillover effects in energy futures markets. Energy Economics, 23, 43-56. Linton, O., Maasoumi, E., Whang, Y-J. (2005). Consistent testing for stochastic dominance under general sampling schemes. Review of Economic Studies, 72, 735-765. Markowitz, H.M. (1952a). Portfolio selection. Journal of Finance, 7, 77-91. Markowitz, H.M. (1952b), The Utility of Wealth. Journal of Political Economy, 60, 151-156. McFadden, D. (1989). Testing for stochastic dominance. In: T.B. Fomby and T.K. Seo, (Eds.), Studies in the Economics of Uncertainty. Springer Verlag, New York. Morey, M.R., Morey, R.C. (2000). An analytical confidence interval for the Treynor index: formula, conditions and properties. Journal of Business Finance & Accounting, 27(1) & (2), 127-154. Post, T., Levy, H. (2005). Does risk seeking drive asset prices? A stochastic dominance analysis of aggregate investor preferences and beliefs. Review of Financial Studies, 18(3), 925-953. Qiao, Z., Clark, E., Wong, W.K. (2013). Investors’ Preference towards Risk: Evidence from the Taiwan Stock and Stock Index Futures Markets. To appear in Accounting & Finance. Quirk J.P., Saposnik, R. (1962). Admissibility and measurable utility functions. Review of Economic Studies, 29, 140-146. Rothschild, M., Stiglitz, J.E. (1970). Increasing risk I. A definition. Journal of Economic Theory, 2, 225-243. Schwartz, T.V., Szakmary, A.C. (1994). Price discovery in petroleum markets: arbitrage, cointegration and the time interval of analysis. Journal of Futures Markets, 14, 147-167. Sharpe, W.F. (1964). Capital asset prices: Theory of market equilibrium under conditions of risk. Journal of Finance 19, 425-442. Sriboonchitta, S., Wong, W.K., Dhompongsa, S., Nguyen, H.T. (2009). Stochastic Dominance and Applications to Finance, Risk and Economics, Chapman and Hall/CRC, Taylor and Francis Group, Boca Raton, Florida, USA. Tesfatsion, L. (1976). Stochastic dominance and maximization of expected utility. Review of Economic Studies, 43, 301-315. Treynor, J.L. (1965). How to rate management of investment funds. Harvard Business Review, 43, 63-75. Tse, Y.K., Zhang, X. (2004). A Monte Carlo investigation of some tests for stochastic dominance. Journal of Statistical Computation and Simulation, 74, 361-378. Tversky, A., Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5, 297-323. Wilson, B., Aggarwal, R., Inclan, C. (1996). Detecting volatility changes across the oil sector. Journal of Futures Markets, 16, 313-320. Wong, W.K. (2007). Stochastic dominance and mean-variance measures of profit and loss for business planning and investment. European Journal of Operational Research, 182, 829-843. Wong, W.K., Chan, R.H. (2008). Markowitz and prospect stochastic dominances. Annals of Finance, 4(1), 105-129. Wong, W.K., Li, C.K. (1999). A note on convex stochastic dominance theory. Economics Letters, 62, 293-300. Wong, W.K. Ma, C. (2008). Preferences over location-scale family. Economic Theory, 37(1), 119-146. Wong, W.K., Phoon, K.F., Lean, H.H. (2008). Stochastic dominance analysis of Asian hedge funds. Pacific-Basin Finance Journal, 16(3), 204-223.

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.

Description

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.