Investigating long-run cointegration and lead lag relationship between spot and future markets of energy commodities

Abstract

The study tries to investigate the cointegration and causality relationship between the spot and future prices of crude oil and natural gas traded on Multi Commodity Exchange (MCX) of India. The study has used daily closing spot and future prices of the commodities under study from the period 2005 to 2020. The data is converted into stationary time series which is a mandatory condition for time series analysis. The results of Johansen Co-integration test reveals that there is long-run cointegration between the spot and future prices of both the commodities. Appropriate lag length was selected by using Schwarz information Criterion (SIC) lag length criteria. The estimates of VEC Granger Causality Test/Block Exogeneity Wald Test show a bi-directional causality relationship in the prices of crude oil and natural gas. The spot and future markets of energy commodities are equally efficient in adjusting the new information in their equilibrium prices which reveals the absence of any lead-lag relationship between the markets.