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Testing for adjustment costs and regime shifts in BRENT crude futures market

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  • Mamatzakis, E.
  • Remoundos, P.

Abstract

This paper, using a threshold vector error-correction (TVECM) model, examines whether BRENT crude spot and futures oil prices are cointegrated. By employing this methodology we are able to evaluate the degree and dynamics of transaction costs resulting from various market imperfections. TVECM model is applied on daily spot and futures oil prices covering the period 1990-2009. The hypothesis we test is to what extent BRENT crude is indeed an integrated oil market in terms of threshold effects and adjustment costs. Our findings support that market follows a gradual integration path. We find that BRENT crude spot and futures are cointegrated, though two regimes are clearly identified. This implies that a threshold exists and it is indeed significant. Adjustment costs in the error correction are present, and they are valid at the typical regime that is the dominant, and as a result should not be ignored.

Suggested Citation

  • Mamatzakis, E. & Remoundos, P., 2011. "Testing for adjustment costs and regime shifts in BRENT crude futures market," Economic Modelling, Elsevier, vol. 28(3), pages 1000-1008, May.
  • Handle: RePEc:eee:ecmode:v:28:y:2011:i:3:p:1000-1008
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    Cited by:

    1. Liu, Li & Chen, Ching-Cheng & Wan, Jieqiu, 2013. "Is world oil market “one great pool”?: An example from China's and international oil markets," Economic Modelling, Elsevier, vol. 35(C), pages 364-373.
    2. Kaabia, Olfa & Abid, Ilyes & Mkaouar, Farid, 2016. "The dark side of the black gold shock onto Europe: One stock's joy is another stock's sorrow," Economic Modelling, Elsevier, vol. 58(C), pages 642-654.
    3. repec:eee:eneeco:v:65:y:2017:i:c:p:424-433 is not listed on IDEAS
    4. Beckmann, Joscha & Belke, Ansgar & Czudaj, Robert, 2014. "Regime-dependent adjustment in energy spot and futures markets," Economic Modelling, Elsevier, vol. 40(C), pages 400-409.

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