The Time-Dependent Lead-Lag Relationship Between WTI and Brent Crude Oil Spot Markets

Yang, Yanhong; Shao, Ying-Hui; Shao, Hao-Lin; Song, Xiaoling

doi:10.3389/fphy.2020.00132

Cited by 9 publications

(4 citation statements)

References 30 publications

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“…Furthermore, crude oil return changes leading ahead gold and copper and brent return changes whereas gold leads copper. This finding confirms the results of Yang et al. (2020) which indicate that West Texas intermediate (WTI) spot price slightly leads Brent spot price.…”

Section: Resultssupporting

confidence: 90%

The impact of COVID-19 on the portfolio optimization

Trichilli

Abbes

2022

EMJB

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PurposeThis article unveils first the lead–lag structure between the confirmed cases of COVID-19 and financial markets, including the stock (DJI), cryptocurrency (Bitcoin) and commodities (crude oil, gold, copper and brent oil) compared to the financial stress index. Second, this paper assesses the role of Bitcoin as a hedge or diversifier by determining the efficient frontier with and without including Bitcoin before and during the COVID-19 pandemic.Design/methodology/approachThe authors examine the lead–lag relationship between COVID-19 and financial market returns compared to the financial stress index and between all markets returns using the thermal optimal path model. Moreover, the authors estimate the efficient frontier of the portfolio with and without Bitcoin using the Bayesian approach.FindingsEmploying thermal optimal path model, the authors find that COVID-19 confirmed cases are leading returns prices of DJI, Bitcoin and crude oil, gold, copper and brent oil. Moreover, the authors find a strong lead–lag relationship between all financial market returns. By relying on the Bayesian approach, findings show when Bitcoin was included in the portfolio optimization before or during COVID-19 period; the Bayesian efficient frontier shifts to the left giving the investor a better risk return trade-off. Consequently, Bitcoin serves as a safe haven asset for the two sub-periods: pre-COVID-19 period and COVID-19 period.Practical implicationsBased on the above research conclusions, investors can use the number of COVID-19 confirmed cases to predict financial market dynamics. Similarly, the work is helpful for decision-makers who search for portfolio diversification opportunities, especially during health crisis. In addition, the results support the fact that Bitcoin is a safe haven asset that should be combined with commodities and stocks for better performance in portfolio optimization and hedging before and during COVID-19 periods.Originality/valueThis research thus adds value to the existing literature along four directions. First, the novelty of this study lies in the analysis of several financial markets (stock, cryptocurrencies and commodities)’ response to different pandemics and epidemics events, financial crises and natural disasters (Correia et al., 2020; Ma et al., 2020). Second, to the best of the authors' knowledge, this is the first study that examine the lead–lag relationship between COVID-19 and financial markets compared to financial stress index by employing the Thermal Optimal Path method. Third, it is a first endeavor to analyze the lead–lag interplay between the financial markets within a thermal optimal path method that can provide useful insights for the spillover effect studies in all countries and regions around the world. To check the robustness of our findings, the authors have employed financial stress index compared to COVID-19 confirmed cases. Fourth, this study tests whether Bitcoin is a hedge or diversifier given this current pandemic situation using the Bayesian approach.

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Section: Resultssupporting

confidence: 90%

The impact of COVID-19 on the portfolio optimization

Trichilli

Abbes

2022

EMJB

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“…Moreover, Elder, Miao, and Ramchander (2014) for the 2007-2012 period and Liu, Schultz, and Swieringa (2015) for the 2008-2011 period find evidence that WTI has more price leading power than Brent has if WTI and Brent are cointegrated. Yang, Shao, Shao, and Song (2020) investigate the lead-lag price relationship between WTI and Brent from 1987 to 2017 with the non-parametric symmetric Thermal Optimal Path (TOP) method. Their evidence indicates that there is price leadership of WTI over Brent and claims that this lead-lag relationship is volatile and sensitive to extreme events.…”

Section: Introductionmentioning

confidence: 99%

The long-run relationship between the prices of WTI and Brent crude oils – Periodogram based cointegration analyses

Akdi

Varlık

Berument

2023

5049

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The purpose of this article is to investigate the presence of a cointegrating relationship between the prices of the two most important crude oil price benchmarks, which are West Texas Intermediate and Brent, for June 1987-July 2021. We use the periodogram-based methodology. Our finding suggests a global long-run relationship between two major crude oil prices for the 1987:06-2010:03 period until the Deepwater Horizon oil spill took place at the Macondo Field, located in the Gulf of Mexico. After this accident, the relationship breaks down. We also find statistically significant closely 12-month common periodicities in both series for the pre-oil spill accident. We conclude that the cointegrating relationship between the two oil prices maintained up to 2010:03. This finding provides a practical implication that these two crude oil prices cannot be used for hedging purposes after this date.

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“…Notice that the crude oil market is affected by economic conditions [11], political events [12], policy changes [13,14] and other factors, dynamics of the efficiency on crude oil market during events and crisis is of cardinal significance to investors as it indicates possible abnormal returns. This study focuses on the time-varying efficiency on crude oil market before and after the policy shift.…”

Section: Introductionmentioning

confidence: 99%

“…On 18 December 2015, President Obama signed a provision that lifted the 40-years old oil export ban. After the lift, the lead-lag relationship between WTI and Brent has changed [14] and the two benchmarks reconnected closely [ 13,14]. However, the impact of this policy shift on crude oil market efficiency is still open to question.…”

Section: Introductionmentioning

confidence: 99%

Does Crude Oil Market Efficiency Improve After the Lift of the U.S. Export Ban? Evidence From Time-Varying Hurst Exponent

Shao

2020

Front. Phys.

Self Cite

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On 18 December 2015, the 40-years old U.S. crude oil export ban was repealed. Since then U.S. crude and oil producers were allowed to reach the global market. In this paper, we study if the crude oil market efficiency increases after the lift of the export ban via the Centered Detrending Moving average Analysis (CDMA) and the Detrended Fluctuation Analysis (DFA). We examine the time-varying market inefficiency from 2011 to 2020 with different rolling windows. The results indicate that WTI becomes inefficient after the lift in medium-term. Though in short and long-term, there is evidence for the improvement of the degree of market efficiency. Generally, the WTI market presents mixed efficiency behavior at different time horizons. In 1-year window, the degree of efficiency on Brent decreased while there isn't enough evidence to conclude that Brent market efficiency increased or decreased in medium and long term. In this sense, the lift of the ban might have significant impact on WTI but not on Brent.

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The Time-Dependent Lead-Lag Relationship Between WTI and Brent Crude Oil Spot Markets

Cited by 9 publications

References 30 publications

The impact of COVID-19 on the portfolio optimization

The impact of COVID-19 on the portfolio optimization

The long-run relationship between the prices of WTI and Brent crude oils – Periodogram based cointegration analyses

Does Crude Oil Market Efficiency Improve After the Lift of the U.S. Export Ban? Evidence From Time-Varying Hurst Exponent

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