IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v523y2019icp723-733.html
   My bibliography  Save this article

Time-varying lead–lag structure between the crude oil spot and futures markets

Author

Listed:
  • Shao, Ying-Hui
  • Yang, Yan-Hong
  • Shao, Hao-Lin
  • Stanley, H. Eugene

Abstract

The linkages between crude oil spot and futures markets are widely studied in previous literatures. Most of these conventional methods are static, linear and parametric. In order to overcome this difficulty, we employ the nonparametric and nonlinear symmetric thermal optimal path (TOPS) method to determine the time-dependent lead–lag relationship between two time series. Based on the daily, weekly, monthly spot and futures returns for maturities of one, two, three and four months of the West Texas Intermediate (WTI) crude oil benchmark, we apply the TOPS method together with self-consistent test to investigate the time-varying lead–lag dependences between spot and futures markets from 1987 to 2017. We find that, for total three data sets with different frequencies, the TOPS paths indicate an alternate lead–lag structure instead of a dominance between spot and futures markets in most of the time periods. For the daily data, the lead–lag relationship between the two markets exists within one day except on some specific days. Moreover, without considering the units of time, on average, the lead–lag steps between the two markets are diminishing with the increasing frequency. Roughly speaking, these periods with strong lead–lag signals coincide with major influential changes in the oil and stock markets and the geopolitics, which can reflect real economic, financial and geopolitical regime changes. All in all, the results show that the lead–lag relationship between the spot and futures oil markets exists only temporarily.

Suggested Citation

  • Shao, Ying-Hui & Yang, Yan-Hong & Shao, Hao-Lin & Stanley, H. Eugene, 2019. "Time-varying lead–lag structure between the crude oil spot and futures markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 723-733.
    • Handle: RePEc:eee:phsmap:v:523:y:2019:i:c:p:723-733
    DOI: 10.1016/j.physa.2019.03.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437119302213
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2019.03.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Yu‐Lun Chen & Yin‐Feng Gau, 2009. "Tick sizes and relative rates of price discovery in stock, futures, and options markets: Evidence from the Taiwan stock exchange," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(1), pages 74-93, January.
    2. Hon-Lun Chung & Wai-Sum Chan & Jonathan Batten, 2011. "Threshold non-linear dynamics between Hang Seng stock index and futures returns," The European Journal of Finance, Taylor & Francis Journals, vol. 17(7), pages 471-486.
    3. Jian Yang & Zihui Yang & Yinggang Zhou, 2012. "Intraday price discovery and volatility transmission in stock index and stock index futures markets: Evidence from China," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(2), pages 99-121, February.
    4. Didier Sornette & Wei-Xing Zhou, 2005. "Non-parametric determination of real-time lag structure between two time series: the 'optimal thermal causal path' method," Quantitative Finance, Taylor & Francis Journals, vol. 5(6), pages 577-591.
    5. Kun Guo & Wei-Xing Zhou & Si-Wei Cheng & Didier Sornette, 2011. "The US Stock Market Leads the Federal Funds Rate and Treasury Bond Yields," PLOS ONE, Public Library of Science, vol. 6(8), pages 1-9, August.
    6. Jing Quan, 1992. "Two‐step testing procedure for price discovery role of futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(2), pages 139-149, April.
    7. Juan Cabrera & Tao Wang & Jian Yang, 2009. "Do futures lead price discovery in electronic foreign exchange markets?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(2), pages 137-156, February.
    8. Michael A. Pizzi & Andrew J. Economopoulos & Heather M. O'Neill, 1998. "An examination of the relationship between stock index cash and futures markets: A cointegration approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(3), pages 297-305, May.
    9. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    10. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    11. Anthony E. Bopp & Scott Sitzer, 1987. "Are petroleum futures prices good predictors of cash value?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 7(6), pages 705-719, December.
    12. Zhou, Wei-Xing & Sornette, Didier, 2006. "Non-parametric determination of real-time lag structure between two time series: The "optimal thermal causal path" method with applications to economic data," Journal of Macroeconomics, Elsevier, vol. 28(1), pages 195-224, March.
    13. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-1167, July.
    14. Zhou, Wei-Xing & Sornette, Didier, 2007. "Lead-lag cross-sectional structure and detection of correlated–anticorrelated regime shifts: Application to the volatilities of inflation and economic growth rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 380(C), pages 287-296.
    15. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    16. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    17. Martin T. Bohl & Christian A. Salm & Bernd Wilfling, 2011. "Do individual index futures investors destabilize the underlying spot market?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(1), pages 81-101, January.
    18. Huang, Bwo-Nung & Yang, C.W. & Hwang, M.J., 2009. "The dynamics of a nonlinear relationship between crude oil spot and futures prices: A multivariate threshold regression approach," Energy Economics, Elsevier, vol. 31(1), pages 91-98, January.
    19. Chiou-Wei, Song-Zan & Linn, Scott C. & Zhu, Zhen, 2014. "The response of U.S. natural gas futures and spot prices to storage change surprises: Fundamental information and the effect of escalating physical gas production," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 156-173.
    20. Xu, Hai-Chuan & Zhou, Wei-Xing & Sornette, Didier, 2017. "Time-dependent lead-lag relationship between the onshore and offshore Renminbi exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 49(C), pages 173-183.
    21. Moosa, Imad A. & Al-Loughani, Nabeel E., 1994. "Unbiasedness and time varying risk premia in the crude oil futures market," Energy Economics, Elsevier, vol. 16(2), pages 99-105, April.
    22. Cao, Guangxi & Han, Yan & Cui, Weijun & Guo, Yu, 2014. "Multifractal detrended cross-correlations between the CSI 300 index futures and the spot markets based on high-frequency data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 414(C), pages 308-320.
    23. Hao Meng & Hai-Chuan Xu & Wei-Xing Zhou & Didier Sornette, 2017. "Symmetric thermal optimal path and time-dependent lead-lag relationship: novel statistical tests and application to UK and US real-estate and monetary policies," Quantitative Finance, Taylor & Francis Journals, vol. 17(6), pages 959-977, June.
    24. Balcilar, Mehmet & Gungor, Hasan & Hammoudeh, Shawkat, 2015. "The time-varying causality between spot and futures crude oil prices: A regime switching approach," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 51-71.
    25. Bekiros, Stelios D. & Diks, Cees G.H., 2008. "The relationship between crude oil spot and futures prices: Cointegration, linear and nonlinear causality," Energy Economics, Elsevier, vol. 30(5), pages 2673-2685, September.
    26. Ivanov, Stoyu I. & Jones, Frank J. & Zaima, Janis K., 2013. "Analysis of DJIA, S&P 500, S&P 400, NASDAQ 100 and Russell 2000 ETFs and their influence on price discovery," Global Finance Journal, Elsevier, vol. 24(3), pages 171-187.
    27. Imad A. Moosa, 2002. "Price Discovery and Risk Transfer in the Crude Oil Futures Market: Some Structural Time Series Evidence," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 31(1), pages 155-165, February.
    28. Donald Lien & Y. K. Tse & Xibin Zhang, 2003. "Structural change and lead-lag relationship between the Nikkei spot index and futures price: a genetic programming approach," Quantitative Finance, Taylor & Francis Journals, vol. 3(2), pages 136-144.
    29. Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
    30. Jones, Charles M & Kaul, Gautam, 1996. "Oil and the Stock Markets," Journal of Finance, American Finance Association, vol. 51(2), pages 463-491, June.
    31. Thomas V. Schwarz & Andrew C. Szakmary, 1994. "Price discovery in petroleum markets: Arbitrage, cointegration, and the time interval of analysis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(2), pages 147-167, April.
    32. Kang, Sang Hoon & Cheong, Chongcheul & Yoon, Seong-Min, 2013. "Intraday volatility spillovers between spot and futures indices: Evidence from the Korean stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(8), pages 1795-1802.
    33. Judge, Amrit & Reancharoen, Tipprapa, 2014. "An empirical examination of the lead–lag relationship between spot and futures markets: Evidence from Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 335-358.
    34. Donghua Wang & Jingqing Tu & Xiaohui Chang & Saiping Li, 2017. "The lead–lag relationship between the spot and futures markets in China," Quantitative Finance, Taylor & Francis Journals, vol. 17(9), pages 1447-1456, September.
    35. Mahmoud Wahab & Malek Lashgari, 1993. "Price dynamics and error correction in stock index and stock index futures markets: A cointegration approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(7), pages 711-742, October.
    36. Hammoudeh, Shawkat & Li, Huimin & Jeon, Bang, 2003. "Causality and volatility spillovers among petroleum prices of WTI, gasoline and heating oil in different locations," The North American Journal of Economics and Finance, Elsevier, vol. 14(1), pages 89-114, March.
    37. Param Silvapulle & Imad A. Moosa, 1999. "The relationship between spot and futures prices: Evidence from the crude oil market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(2), pages 175-193, April.
    38. Jangkoo Kang & Chang Joo Lee & Soonhee Lee, 2006. "An Empirical Investigation of the Lead-Lag Relations of Returns and Volatilities among the KOSPI200 Spot, Futures and Options Markets and their Explanations," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 5(3), pages 235-261, December.
    39. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 123-152.
    40. Geweke, John, 1984. "Inference and causality in economic time series models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 19, pages 1101-1144, Elsevier.
    41. Ng, Victor K. & Pirrong, Stephen Craig, 1996. "Price dynamics in refined petroleum spot and futures markets," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 359-388, February.
    42. Sornette, Didier & Woodard, Ryan & Zhou, Wei-Xing, 2009. "The 2006–2008 oil bubble: Evidence of speculation, and prediction," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(8), pages 1571-1576.
    43. Foster, Andrew J., 1996. "Price discovery in oil markets: a time varying analysis of the 1990-1991 Gulf conflict," Energy Economics, Elsevier, vol. 18(3), pages 231-246, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yang, Yan-Hong & Shao, Ying-Hui, 2020. "Time-dependent lead-lag relationships between the VIX and VIX futures markets," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    2. Shao, Mingao & Hua, Yongjun, 2022. "Price discovery efficiency of China's crude oil futures: Evidence from the Shanghai crude oil futures market," Energy Economics, Elsevier, vol. 112(C).
    3. Guo, Yaoqi & Yao, Shanshan & Cheng, Hui & Zhu, Wensong, 2020. "China's copper futures market efficiency analysis: Based on nonlinear Granger causality and multifractal methods," Resources Policy, Elsevier, vol. 68(C).
    4. Fei Ren & Mei-Ling Cai & Sai-Ping Li & Xiong Xiong & Zhang-HangJian Chen, 2023. "A Multi-market Comparison of the Intraday Lead–Lag Relations Among Stock Index-Based Spot, Futures and Options," Computational Economics, Springer;Society for Computational Economics, vol. 62(1), pages 1-28, June.
    5. Chen, Zhang-HangJian & Ren, Fei & Yang, Ming-Yuan & Lu, Feng-Zhi & Li, Sai-Ping, 2023. "Dynamic lead–lag relationship between Chinese carbon emission trading and stock markets under exogenous shocks," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 295-305.
    6. Zhang, Qi & Di, Peng & Farnoosh, Arash, 2021. "Study on the impacts of Shanghai crude oil futures on global oil market and oil industry based on VECM and DAG models," Energy, Elsevier, vol. 223(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yang, Yan-Hong & Shao, Ying-Hui, 2020. "Time-dependent lead-lag relationships between the VIX and VIX futures markets," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    2. Balcilar, Mehmet & Gungor, Hasan & Hammoudeh, Shawkat, 2015. "The time-varying causality between spot and futures crude oil prices: A regime switching approach," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 51-71.
    3. Kumar, Satish, 2018. "Price discovery in emerging currency markets," Research in International Business and Finance, Elsevier, vol. 46(C), pages 528-536.
    4. Yan-Hong Yang & Ying-Hui Shao, 2019. "Time-dependent lead-lag relationships between the VIX and VIX futures markets," Papers 1910.13729, arXiv.org.
    5. Xiaojie Xu, 2018. "Cointegration and price discovery in US corn cash and futures markets," Empirical Economics, Springer, vol. 55(4), pages 1889-1923, December.
    6. Judge, Amrit & Reancharoen, Tipprapa, 2014. "An empirical examination of the lead–lag relationship between spot and futures markets: Evidence from Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 335-358.
    7. Asche, Frank & Misund, Bard & Oglend, Atle, 2015. "The Spot-Forward Relationship in the Atlantic Salmon Market," UiS Working Papers in Economics and Finance 2015/16, University of Stavanger.
    8. Gong, Chen-Chen & Ji, Shen-Dan & Su, Li-Ling & Li, Sai-Ping & Ren, Fei, 2016. "The lead–lag relationship between stock index and stock index futures: A thermal optimal path method," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 444(C), pages 63-72.
    9. Jing Hao & Xiong Xiong & Feng He & Feng Ma, 2019. "Price Discovery in the Chinese Stock Index Futures Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(13), pages 2982-2996, October.
    10. Jiang, Tao & Bao, Si & Li, Long, 2019. "The linear and nonlinear lead–lag relationship among three SSE 50 Index markets: The index futures, 50ETF spot and options markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 525(C), pages 878-893.
    11. Sarveshwar Kumar Inani, 2017. "Price discovery in Indian stock index futures market: new evidence based on intraday data," International Journal of Indian Culture and Business Management, Inderscience Enterprises Ltd, vol. 14(1), pages 23-43.
    12. Xu, Hai-Chuan & Zhou, Wei-Xing & Sornette, Didier, 2017. "Time-dependent lead-lag relationship between the onshore and offshore Renminbi exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 49(C), pages 173-183.
    13. Salman Sarwat & Muhammad Kashif & Muhammad Aqil & Farhan Ahmed, 2019. "Determination of Causality in Prices of Crude Oil," International Journal of Energy Economics and Policy, Econjournals, vol. 9(4), pages 298-304.
    14. Sebastian Nick, 2016. "The Informational Efficiency of European Natural Gas Hubs: Price Formation and Intertemporal Arbitrage," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    15. Sanjay Sehgal & Mala Dutt, 2016. "Domestic and international information linkages between NSE Nifty spot and futures markets: an empirical study for India," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 43(3), pages 239-258, September.
    16. Fei Ren & Mei-Ling Cai & Sai-Ping Li & Xiong Xiong & Zhang-HangJian Chen, 2023. "A Multi-market Comparison of the Intraday Lead–Lag Relations Among Stock Index-Based Spot, Futures and Options," Computational Economics, Springer;Society for Computational Economics, vol. 62(1), pages 1-28, June.
    17. Xianfang Su & Huiming Zhu & Xinxia Yang, 2019. "Heterogeneous Causal Relationships between Spot and Futures Oil Prices: Evidence from Quantile Causality Analysis," Sustainability, MDPI, vol. 11(5), pages 1-17, March.
    18. Pradhan, Rudra P. & Hall, John H. & du Toit, Elda, 2021. "The lead–lag relationship between spot and futures prices: Empirical evidence from the Indian commodity market," Resources Policy, Elsevier, vol. 70(C).
    19. Yang Hu & Yang (Greg) Hou & Les Oxley, 2019. "Spot and Futures Prices of Bitcoin: Causality, Cointegration and Price Discovery from a Time-Varying Perspective," Working Papers in Economics 19/13, University of Waikato.
    20. Xu Xiaojie, 2018. "Linear and Nonlinear Causality between Corn Cash and Futures Prices," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 16(2), pages 1-16, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:523:y:2019:i:c:p:723-733. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.