The Comovements between Futures Markets for Crude Oil: Evidence from a Structural GARCH Model
AbstractThis paper studies the linkages between the prices of oil futures traded on the New York Mercantile Exchange and the Intercontinental Exchange of London. We estimate a structural BEKK-GARCH model that allows for non-zero correlation between the structural innovations. We identify the structural parameters through restrictions on the reduced-form GARCH model. We find that the oil futures traded on the NYMEX and ICE can be used for mutual hedging purposes only when the structural conditional variances of both innovations are modest and, as such, no turbulent events have taken place. Periods with positive structural correlations are instead associated with peaks in the structural conditional variance of both innovations. During times of market turmoil, the structural variance of the returns on NYMEX futures becomes larger than that of ICE futures. This means that, when there are common shocks to both markets, the NYMEX reacts more strongly than the ICE. Our empirical evidence explains the negative reduced-form correlation between the two returns which is observed in turbulent periods.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2007:15.
Length: 19 pages
Date of creation: 14 Aug 2007
Date of revision:
Contact details of provider:
Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
Phone: +46 8 16 20 00
Fax: +46 8 16 14 25
Web page: http://www.ne.su.se/
More information through EDIRC
oil prices; futures markets; GARCH; structural VAR;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G19 - Financial Economics - - General Financial Markets - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-18 (All new papers)
- NEP-ENE-2007-08-18 (Energy Economics)
- NEP-RMG-2007-08-18 (Risk Management)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Ashima Goyal & Shruti Tripathi, 2012. "Regulations and price discovery: oil spot and futures markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-016, Indira Gandhi Institute of Development Research, Mumbai, India.
- Morales, Lucía & Andreosso-O'Callaghan, Bernadette, 2011. "Comparative analysis on the effects of the Asian and global financial crises on precious metal markets," Research in International Business and Finance, Elsevier, vol. 25(2), pages 203-227, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sten Nyberg).
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.