In the theory of finance, a market for any asset or commodity is said to be efficient if items of identical quality and other attributes (such as risk, in the case of stocks) are sold at the same price. A Geneva-based oil industry analyst wants to test the hypothesis that the spot market for crude oil is efficient. The analyst chooses the Rotterdam oil market, and he selects Arabian Light as the type of oil to be studied. (Differences in location may cause price differences because of transportation costs, and differences in the type of oil-hence, in the quality of oil-also affect the price. Therefore, both the type and the location must be fixed.) A random sample of eight observations from each of four sources of the spot price of a barrel of oil during February 2007 is collected. Data, in U.S. dollars per barrel, are as follows.
Based on these data, what should the analyst conclude about whether the market for crude oil is efficient? Are conclusions valid only for the Rotterdam market? Are conclusions valid for all types of crude oil? What assumptions are necessary for the analysis? Do you believe that all the assumptions are met in this case? What are the limitations, if any, of this study? Discuss.
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