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Revealing asymmetries in the loss function of WTI oil futures market

journal contribution
posted on 2023-06-15, 14:49 authored by E C Mamatzakis
This paper examines behavioural aspects of the West Texas Intermediate (WTI) oil 1-month futures from 1995 to 2012. We consider that oil futures are formed based on an underlying generalised loss function with an unknown shape parameter that provides information regarding preferences. Even without observing fundamentals of WTI oil futures we can assess whether preferences lean towards a symmetric or asymmetric loss function. Our empirical evidence is robust across information sets and shows that overall loss preferences of WTI 1-month oil futures are rather optimistic and thus the underlying loss function is asymmetric. This implies that if one disregards this asymmetry the WTI oil futures should not be viewed as rational. We further provide statistical tests that allow deviations from a symmetric loss function. As part of a sensitivity analysis, and given the long span of our sample, we perform a novel analysis for detecting breakdowns in our series over time. Based on this analysis we re-examine the shape parameters of the loss function for WTI oil month futures for sub-periods. Interestingly, preferences of WTI 1-month oil futures have shifted towards optimism post 2008 period, marking the collapse of Lehman Brothers.

History

Publication status

  • Published

File Version

  • Published version

Journal

Empirical Economics

ISSN

0377-7332

Publisher

Springer Verlag

Issue

201802

Volume

47

Page range

411-426

Department affiliated with

  • Business and Management Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2014-03-12

First Compliant Deposit (FCD) Date

2014-03-12

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