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A new way of measuring the WTI – Brent spread. Globalization, shock persistence and common trends

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  • Bravo Caro, José Manuel
  • Golpe, Antonio A.
  • Iglesias, Jesús
  • Vides, José Carlos

Abstract

The standard cointegration and the persistence of the spread of the Brent-WTI price have been widely analyzed. However, no studies have been able to present evidence of both issues jointly so far. A novel focus is presented in this paper from the application of the fractionally cointegrated vector autoregressive (FCVAR) approach, which allows the rigidity of the standard cointegration to be solved. As result of the application of the FCVAR model, we identify several degrees of globalization by analyzing the order of integration of the error correction term. Indeed, by using Permanent-Transitory decomposition analysis, we present what drives the relationship between both oil crude prices’ information. The findings shown here reveal that the Brent-WTI market is strongly globalized. Nevertheless, the Brent–WTI price spread follows a long memory process, and the Brent drives the Brent-WTI price structure. These results sustain some corollaries on economic policies for economic agents, policy makers and business operators.

Suggested Citation

  • Bravo Caro, José Manuel & Golpe, Antonio A. & Iglesias, Jesús & Vides, José Carlos, 2020. "A new way of measuring the WTI – Brent spread. Globalization, shock persistence and common trends," Energy Economics, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:eneeco:v:85:y:2020:i:c:s014098831930341x
    DOI: 10.1016/j.eneco.2019.104546
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    Keywords

    Crude oil; Brent; WTI; Fractional cointegration; Persistence; PT decomposition;
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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