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Are crude oil spot and futures prices cointegrated? Not always!

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  • Wang, Yudong
  • Wu, Chongfeng
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    Abstract

    In previous studies, the cointegration relationships between crude oil spot and futures prices are confirmed based on Johansen (1988) test and vector error correction model (VECM). These conventional methods assume that the process of long-run equilibrium adjustment is linear. This paper revisits this topic employing nonlinear threshold VECM to take into account the nonlinear dynamics of equilibrium adjustment. Our results show that crude oil spot and futures prices are cointegrated only when the price differentials are larger than the threshold value. Moreover, we use a multi-frequency analysis based on low-pass filtering with different cut-off frequencies. The main findings indicate that the relationships between spot and futures prices are different between in the short-term and in the long-term. In the short-term, futures price plays the major role in the formation of long-run equilibrium (error correction mechanism). In the long-term, both spot and futures prices contribute to the dynamics of long-run equilibrium.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 33 (2013)
    Issue (Month): C ()
    Pages: 641-650

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    Handle: RePEc:eee:ecmode:v:33:y:2013:i:c:p:641-650

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Crude oil price; Futures; Multi-frequency analysis; Cointegration; TVECM;

    References

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    Cited by:
    1. Liu, Li & Chen, Ching-Cheng & Wan, Jieqiu, 2013. "Is world oil market “one great pool”?: An example from China's and international oil markets," Economic Modelling, Elsevier, Elsevier, vol. 35(C), pages 364-373.

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