The dynamics of crude oil price differentials
Crude oil price differentials are modelled as a two-regime threshold autoregressive (TAR) process using the method proposed by Caner and Hansen [Caner, M., Hansen, B.E. Threshold autoregression with a unit root. Econometrica 2001; 69; 1555-1596.]. While standard unit root tests suggest that the prices of crude oil of different varieties move closely together such that their price differential is stationary, the TAR results indicate strong evidence of threshold effects in the adjustment process to the long-run equilibrium. These findings suggest that crude oil prices are linked and thus at the very general level, the oil market is 'one great pool' (Adelman, M.A. International oil agreements. The Energy Journal 1984; 5; 1-9.). However, differences in the dynamics of adjustment suggest that within this one pool, oil markets are not necessarily integrated in every time period and hence the dynamics of crude oil price differentials may not follow a stationary process at all times. Although the development of a liquid futures market around the crude oil benchmarks has helped make some distant markets more unified, arbitrage is not costless or risk-free and temporary breakdowns in the benchmarks can lead to decoupling of crude oil prices.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hansen, Bruce E, 1996.
"Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis,"
Econometric Society, vol. 64(2), pages 413-30, March.
- Tom Doan, . "RATS programs to replicate Hansen's threshold estimation and testing results," Statistical Software Components RTZ00091, Boston College Department of Economics.
- Tom Doan, . "TAR: RATS procedure to estimate a threshold autoregression, tests for threshold effect," Statistical Software Components RTS00209, Boston College Department of Economics.
- Hansen, B.E., 1991. "Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis," RCER Working Papers 296, University of Rochester - Center for Economic Research (RCER).
- Nikolaos Milonas & Thomas Henker, 2001. "Price spread and convenience yield behaviour in the international oil market," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 23-36.
- Serena Ng & Pierre Perron, 2001.
"LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power,"
Econometric Society, vol. 69(6), pages 1519-1554, November.
- Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
- Mehmet Caner & Bruce E. Hansen, 2001.
"Threshold Autoregression with a Unit Root,"
Econometric Society, vol. 69(6), pages 1555-1596, November.
- Weiner, R.J., 1991. "Is the World Oil Market "One Great Pool?"," Papers 9120, Laval - Recherche en Energie.
- Breusch, T S, 1978. "Testing for Autocorrelation in Dynamic Linear Models," Australian Economic Papers, Wiley Blackwell, vol. 17(31), pages 334-55, December.
- Robert J. Weiner, 1991. "Is the World Oil Market "One Great Pool"?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 95-108.
- Shawkat M. Hammoudeh & Bradley T. Ewing & Mark A. Thompson, 2008. "Threshold Cointegration Analysis of Crude Oil Benchmarks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 79-96.
- Alizadeh, Amir H. & Nomikos, Nikos K., 2004. "Cost of carry, causality and arbitrage between oil futures and tanker freight markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 40(4), pages 297-316, July.
- Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
- Balke, Nathan S. & Fomby, Thomas B., 1992.
9209, Federal Reserve Bank of Dallas.
- M. A. Adelman, 1984. "International Oil Agreements," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-10.
- Andrew N. Kleit, 2001. "Are Regional Oil Markets Growing Closer Together?: An Arbitrage Cost Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-15.
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:32:y:2010:i:2:p:334-342. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.