Regulations and price discovery: oil spot and futures markets
AbstractIn a period of great oil price volatility, the paper assesses the role of expected net demand compared to liquidity and leverage driven expansion in net long positions. We apply time series tests for mutual and across exchange causality, and lead-lag relationships, between crude oil spot and futures prices on two international and one Indian commodity exchange. We also search for short duration bubbles, and how they differ across exchanges. The results show expectations mediated through financial markets did not lead to persistent deviations from fundamentals. There is mutual Granger causality between spot and futures, and in the error correction model for mature exchanges, spot leads futures. Mature market exchanges lead in price discovery. Futures in these markets lead Indian (daily) futures-markets are integrated. But there is stronger evidence of short-term or collapsing bubbles in mature market futures compared to Indian, although mature markets have a higher share of hedging. Indian regulations such as position limits may have mitigated short duration bubbles. It follows leverage due to lax regulation may be responsible for excess volatility. Well-designed regulations can improve market functioning.
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Bibliographic InfoPaper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2012-016.
Length: 31 pages
Date of creation: Mar 2012
Date of revision:
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More information through EDIRC
crude oil spot; futures; commodity exchanges; short duration bubbles; position limits;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
- NEP-CWA-2012-07-14 (Central & Western Asia)
- NEP-ENE-2012-07-14 (Energy Economics)
- NEP-MST-2012-07-14 (Market Microstructure)
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