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.
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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:
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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/
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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)
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- 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.
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