The relationship between crude oil spot and futures prices: Cointegration, linear and nonlinear causality

Abstract

The present study investigates the linear and nonlinear causal linkages between daily spot and futures prices for maturities of one, two, three and four months of West Texas Intermediate (WTI) crude oil. The data cover two periods October 1991-October 1999 and November 1999-October 2007, with the latter being significantly more turbulent. Apart from the conventional linear Granger test we apply a new nonparametric test for nonlinear causality by Diks and Panchenko after controlling for cointegration. In addition to the traditional pairwise analysis, we test for causality while correcting for the effects of the other variables. To check if any of the observed causality is strictly nonlinear in nature, we also examine the nonlinear causal relationships of VECM filtered residuals. Finally, we investigate the hypothesis of nonlinear non-causality after controlling for conditional heteroskedasticity in the data using a GARCH-BEKK model. Whilst the linear causal relationships disappear after VECM cointegration filtering, nonlinear causal linkages in some cases persist even after GARCH filtering in both periods. This indicates that spot and futures returns may exhibit asymmetries and statistically significant higherorder moments. Moreover, the results imply that if nonlinear effects are accounted for, neither market leads or lags the other consistently, videlicet the pattern of leads and lags changes over time.

Analyzing Crude Oil Spot Price Dynamics versus Long Term Future Prices: A Wavelet Analysis Approach

“…The test reveals that there is a bidirectional causality effect between the futures (both modeled and not modeled) and spot prices for log-returns, although for the case of raw data the causality is unidirectional-from futures to spot prices. Our results are in accordance with several other papers (Silvapulle & Moosa [3]; Bekiros and Diks [6]; Alzahrani et al [15], among others), although in those publications the authors use futures contracts with different maturities (one, two, three, four and six months) instead of long-term futures obtained by a stochastic model and they used other different kinds of causality tests Note: *** indicates statistical significance at the 1% level. Table 5.…”

“…Most studies of the relationship between spot and long-term future prices on the crude oil market are based mainly on the estimation of Pearson's and Spearman's correlation coefficients, the cross-correlation function, cointegration theory (bi-and multivariate) or the use of generalized VAR or (G)ARCH models [3][4][5][6][7]. However, cointegration theory can only tackle short-run vs. long-run time horizons and the VAR and (G)ARCH approaches are sensitive to model specifications [8].…”

Price discovery and risk transfer in the Brent crude oil futures market

“…This implies that there is cointegration relationship between the crude oil spot and the various futures prices. In other word, there is a long run equilibrium relationship between the crude oil spot and futures prices in each case consistent with Bekiros and Diks (2008), Zhang and Wang (2013) and Chen et al (2014). The results also show significant long-run equilibrium relationship between futures contract for different maturities which is consistent with the findings of Hammoudeh et al (2003) and Kaufmann and Ullman (2009).…”

“…Table 3 presents the results of the causality test estimates which show bidirectional causality between the spot and futures prices at one and three-month maturities in the long run. This implies that changes in spot price and futures price can causes changes in each other's price consistent with Bekiros and Diks (2008), Lee and Zeng (2011) and Alzahrani et al (2014). The results suggest that the crude oil spot and futures prices respond to new pricing information instantaneously and therefore perform an equal contribution to price discovery at the different maturities.…”

“…Silvapulle and Moosa (1999) applying the linear and nonlinear causality test on daily spot and futures prices of WTI at one, three and six-month contracts find linear unidirectional causality from futures price to spot price, and bi-directional nonlinear causality between the two prices in the different maturities. Bekiros and Diks (2008) in contrast find bidirectional linear and nonlinear causality between WTI spot and futures contract prices at one to four-months maturities, and observe that if nonlinear effects are accounted for neither markets lead or lag the other in price discovery. Similarly, Lee and Zeng (2011) find linear and nonlinear bi-directional causality between WTI spot and various futures oil prices.…”