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Price Discovery and Risk Transfer in the Crude Oil Futures Market: Some Structural Time Series Evidence

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  • Imad A. Moosa

Abstract

type="main" xml:lang="en"> This paper re-examines the Garbade and Silber (1983) model with the objective of finding out if the crude oil futures market performs the functions of price discovery and risk transfer. The model is estimated, using daily data, as a system of two seemingly unrelated time series equations allowing the coefficients to be time-varying. The empirical results reveal that the futures market performs about 60 per cent of the price discovery function, and that the elasticity of supply of arbitrage services is adequately high for the market to perform the risk transfer function. (J.E.L: G13, C22).

Suggested Citation

  • 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.
    • Handle: RePEc:bla:ecnote:v:31:y:2002:i:1:p:155-165
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    File URL: http://hdl.handle.net/10.1111/1468-0300.00077
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    Cited by:

    1. Sanjay Sehgal & Asheesh Pandey, 2012. "Strategic Allocation, Asset Pricing and Prior Return Patterns: Evidence from Indian Commodity Market," Vision, , vol. 16(4), pages 273-281, December.
    2. 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.
    3. Yue‐Jun Zhang & Shu‐Jiao Ma, 2021. "Exploring the dynamic price discovery, risk transfer and spillover among INE, WTI and Brent crude oil futures markets: Evidence from the high‐frequency data," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2414-2435, April.
    4. P. Srinivasan & P. Ibrahim, 2012. "Price Discovery and Asymmetric Volatility Spillovers in Indian Spot-Futures Gold Markets," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 5(3), pages 65-80, December.
    5. 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.
    6. Onofrio Panzarino & Francesco Potente & Alfonso Puorro, 2016. "BTP futures and cash relationships: a high frequency data analysis," Temi di discussione (Economic working papers) 1083, Bank of Italy, Economic Research and International Relations Area.
    7. Joseph, Anto & Sisodia, Garima & Tiwari, Aviral Kumar, 2014. "A frequency domain causality investigation between futures and spot prices of Indian commodity markets," Economic Modelling, Elsevier, vol. 40(C), pages 250-258.
    8. Patrick Wilson & Simon Stevenson & Ralf Zurbruegg, 2007. "Foreign Property Shocks and the Impact on Domestic Securitized Real Estate Markets: An Unobserved Components Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 34(3), pages 407-424, April.
    9. Raushan Kumar, 2017. "Price Discovery in Some Primary Commodity Markets in India," Economics Bulletin, AccessEcon, vol. 37(3), pages 1817-1829.
    10. Fizaine, Florian, 2015. "Minor metals and organized markets: News highlights about the consequences of establishing a futures market in a thin market with a dual trading price system," Resources Policy, Elsevier, vol. 46(P2), pages 59-70.
    11. Ronald D. Ripple & Imad A. Moosa, 2007. "Hedging effectiveness and futures contract maturity: the case of NYMEX crude oil futures," Applied Financial Economics, Taylor & Francis Journals, vol. 17(9), pages 683-689.
    12. Kao, Chung-Wei & Wan, Jer-Yuh, 2009. "Information transmission and market interactions across the Atlantic -- an empirical study on the natural gas market," Energy Economics, Elsevier, vol. 31(1), pages 152-161, January.
    13. 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.
    14. Pradita Nareswari & Sigit S. Wibowo, 2020. "Global and Local Commodity Prices: A Further Look at the Indonesian Agricultural Commodities," Capital Markets Review, Malaysian Finance Association, vol. 28(1), pages 65-76.
    15. P., Srinivasan, 2011. "Price Discovery and Volatility Spillovers in Indian Spot-Futures Commodity Market," MPRA Paper 47412, University Library of Munich, Germany.
    16. Zhang, Yue-Jun & Wei, Yi-Ming, 2010. "The crude oil market and the gold market: Evidence for cointegration, causality and price discovery," Resources Policy, Elsevier, vol. 35(3), pages 168-177, September.
    17. Ozdemir, Zeynel Abidin & Gokmenoglu, Korhan & Ekinci, Cagdas, 2013. "Persistence in crude oil spot and futures prices," Energy, Elsevier, vol. 59(C), pages 29-37.
    18. 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.
    19. Zhang, Yue-Jun & Wang, Zi-Yi, 2013. "Investigating the price discovery and risk transfer functions in the crude oil and gasoline futures markets: Some empirical evidence," Applied Energy, Elsevier, vol. 104(C), pages 220-228.

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