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Is world oil market “one great pool”?: An example from China's and international oil markets

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  • Liu, Li
  • Chen, Ching-Cheng
  • Wan, Jieqiu

Abstract

In this paper, we examine the hypothesis that world oil market is “one great pool” by investigating the integration between China's and four major crude oil markets. Using a nonlinear correlation measure, we find that the price co-movement between China's and international oil prices is stronger in the long-term than in the short-term. Employing a threshold error correction model, we find that long-term equilibrium relationships display significant asymmetric effects and exist in a regime only. Moreover, international oil prices can drive China's oil prices to run towards long-term equilibrium level, but not vice versa. Finally, we also investigate volatility transmission using BEKK–GARCH models. Both in-sample and out-of-sample evidences indicate that only unidirectional volatility spillover running from benchmark markets to China's oil market can be found. Benchmark markets dominate China's oil market. Overall, our results do not support the “one great pool” hypothesis.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:364-373
    DOI: 10.1016/j.econmod.2013.07.027
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    Cited by:

    1. Ji, Qiang & Fan, Ying, 2016. "How do China's oil markets affect other commodity markets both domestically and internationally?," Finance Research Letters, Elsevier, vol. 19(C), pages 247-254.
    2. Jia, Xiaoliang & An, Haizhong & Sun, Xiaoqi & Huang, Xuan & Wang, Lijun, 2017. "Evolution of world crude oil market integration and diversification: A wavelet-based complex network perspective," Applied Energy, Elsevier, vol. 185(P2), pages 1788-1798.
    3. Yue-Hua Dai & Wen-Jie Xie & Zhi-Qiang Jiang & George J. Jiang & Wei-Xing Zhou, 2014. "Correlation structure and principal components in global crude oil market," Papers 1405.5000, arXiv.org.
    4. Klein, Tony & Walther, Thomas, 2016. "Oil price volatility forecast with mixture memory GARCH," Energy Economics, Elsevier, vol. 58(C), pages 46-58.

    More about this item

    Keywords

    Crude oil; Market integration; Nonlinear correlation; Threshold VECM; Volatility transmission;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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