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Time-varying Granger causality tests for applications in global crude oil markets

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  • Lu, Feng-bin
  • Hong, Yong-miao
  • Wang, Shou-yang
  • Lai, Kin-keung
  • Liu, John

Abstract

This paper proposes time-varying Granger causality tests based on the tests developed by Hong (2001) and two dynamic correlation estimators (i.e., rolling correlation and dynamic conditional correlation multivariate GARCH), here called the rolling Hong and DCC-MGARCH Hong tests, respectively. The proposed tests are used to examine time-varying information spillover among global crude oil markets. The results provide empirical evidence of time-varying information spillover. In particular, the instantaneous causal effects of Dubai and Tapis crudes on Brent and WTI become stronger when a major event or events occur in major oil-producing countries. Such events include the Iraq War in March 2003, OPEC's announcement of a record production cut in December 2008, and the Libyan civil war in early 2011. And consistent with previous studies, WTI and Brent play dominant roles in global crude markets. Impulse response analysis shows that market information has a positive influence on the spillover effect in global crude oil markets. Moreover, the DCC-MGARCH Hong test consistently leads the rolling Hong test, which indicates that the former performs better.

Suggested Citation

  • Lu, Feng-bin & Hong, Yong-miao & Wang, Shou-yang & Lai, Kin-keung & Liu, John, 2014. "Time-varying Granger causality tests for applications in global crude oil markets," Energy Economics, Elsevier, vol. 42(C), pages 289-298.
    • Handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:289-298
    DOI: 10.1016/j.eneco.2014.01.002
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    12. Kanda, Patrick & Burke, Michael & Gupta, Rangan, 2018. "Time-varying causality between equity and currency returns in the United Kingdom: Evidence from over two centuries of data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 506(C), pages 1060-1080.
    13. Jammazi, Rania & Ferrer, Román & Jareño, Francisco & Hammoudeh, Shawkat M., 2017. "Main driving factors of the interest rate-stock market Granger causality," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 260-280.
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    16. Semei Coronado & Rangan Gupta & Saban Nazlioglu & Omar Rojas, 2020. "Time-Varying Causality between Bond and Oil Markets of the United States: Evidence from Over One and Half Centuries of Data," Working Papers 202006, University of Pretoria, Department of Economics.
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    18. Zhang, Dayong & Ji, Qiang & Kutan, Ali M., 2019. "Dynamic transmission mechanisms in global crude oil prices: Estimation and implications," Energy, Elsevier, vol. 175(C), pages 1181-1193.
    19. Kuruppuarachchi, Duminda & Premachandra, I.M., 2016. "Information spillover dynamics of the energy futures market sector: A novel common factor approach," Energy Economics, Elsevier, vol. 57(C), pages 277-294.
    20. Semei Coronado & Rangan Gupta & Besma Hkiri & Omar Rojas, 2020. "Time-Varying Spillover between Currency and Stock Markets in the United States: More than Two Centuries of Historical Evidence," Working Papers 202060, University of Pretoria, Department of Economics.
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    22. Emrah İ. Çevik & Erdal Atukeren & Turhan Korkmaz, 2018. "Oil Prices and Global Stock Markets: A Time-Varying Causality-In-Mean and Causality-in-Variance Analysis," Energies, MDPI, Open Access Journal, vol. 11(10), pages 1-22, October.
    23. Kuck, Konstantin & Schweikert, Karsten, 2017. "A Markov regime-switching model of crude oil market integration," Journal of Commodity Markets, Elsevier, vol. 6(C), pages 16-31.

    More about this item

    Keywords

    Time-varying Granger causality; Information spillover; Rolling correlation; DCC-MGARCH; Crude oil market;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F30 - International Economics - - International Finance - - - General

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