A Variance Ratio Test of Random Walk in Energy Spot Markets
AbstractThis study tests the random walk hypothesis in the spot prices of the petroleum products markets. Under the variance ratio test, a less restrictive random walk process namely the martingale process is examined over the period 1998-2008. The variance ratio methodology is capable of providing information regarding the linearity of multi-period variances, serial correlation as well as possible conditional heteroscedastic effect in the selected spot markets. Due to the long spanning daily data, CUSUM and Andrews tests of structural change are conducted to avoid any possible misleading statistical inferences caused by the unstable parameter in the spot markets. Our empirical findings can be summarized as follows: (1) All the energy markets reject the independent and identically distributed random walk; (2) The WTI crude oil spot prices evidence the presence of autocorrelation and conditional heteroscedastic increments; (3) The Brent crude oil and New York Harbour conventional gasoline spot prices provide strong evidence of conditional heteroscedastic increments martingale process. As a conclusion, although the energy resources returns are martingales, the heteroscedastic increments can still be used to measure the market risk and to earn a risk-adjusted abnormal return in the energy spot markets.
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Bibliographic InfoArticle provided by The Indian Econometric Society in its journal Journal of Quantitative Economics.
Volume (Year): 8 (2010)
Issue (Month): 1 (January)
Postal: Managing Editor, Journal of Quantitative Economics, Indira Gandhi Institute of Development Research (IGIDR), Gen. A.K. Vaidya Marg, Goregaon (E), Mumbai 400 065 , INDIA
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
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