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Do oil spot and futures prices move together?

Author

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  • Chang, Chun-Ping
  • Lee, Chien-Chiang

Abstract

This paper investigates the time-varying correlation and the causal relationship between crude oil spot and futures prices using a newly developed approach — wavelet coherency analysis in time–frequency domain. First, we find evidence of a long-run cointegration relationship between oil spot and futures prices. Moreover, the short-run causality is more significant in shorter maturity pairs versus longer maturity pairs in the vector error correction framework. Second, the results from wavelet coherency analysis show significant dynamic correlations between variables in the time–frequency domain. Third, the illustration of the phase-difference series around zero suggests that spot and futures prices contribute to the dynamics of the long-run equilibrium. Fourth and finally, we provide reasons for the structural changes in oil prices and also recommend investment strategies corresponding to risk diversification. Future studies focusing on the behavior of oil prices should consider the characteristics of the time–frequency space and lead–lag dynamic relationships.

Suggested Citation

  • Chang, Chun-Ping & Lee, Chien-Chiang, 2015. "Do oil spot and futures prices move together?," Energy Economics, Elsevier, vol. 50(C), pages 379-390.
  • Handle: RePEc:eee:eneeco:v:50:y:2015:i:c:p:379-390
    DOI: 10.1016/j.eneco.2015.02.014
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    References listed on IDEAS

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    1. repec:eee:finana:v:52:y:2017:i:c:p:104-118 is not listed on IDEAS
    2. Hao, Yu & Liu, Yiming & Weng, Jia-Hsi & Gao, Yixuan, 2016. "Does the Environmental Kuznets Curve for coal consumption in China exist? New evidence from spatial econometric analysis," Energy, Elsevier, vol. 114(C), pages 1214-1223.
    3. repec:eee:jrpoli:v:53:y:2017:i:c:p:135-146 is not listed on IDEAS
    4. Ya-Hui Huang & Chien-Chiang Lee & Chun-Ping Chang, 2016. "Medical Personnel and Life Expectancy: New Evidence from Taiwan," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 128(3), pages 1425-1447, September.
    5. Nigatu, Getachew & Adjemian, Michael K., 2016. "The U.S. Role in the Price Determination of Major Agricultural Commodities," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236045, Agricultural and Applied Economics Association.
    6. repec:eee:ecmode:v:70:y:2018:i:c:p:97-114 is not listed on IDEAS
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    8. Fernandez, Viviana, 2017. "A historical perspective of the informational content of commodity futures," Resources Policy, Elsevier, vol. 51(C), pages 135-150.
    9. Josué M. Polanco-Martínez & Luis M. Abadie, 2016. "Analyzing Crude Oil Spot Price Dynamics versus Long Term Future Prices: A Wavelet Analysis Approach," Energies, MDPI, Open Access Journal, vol. 9(12), pages 1-19, December.

    More about this item

    Keywords

    Oil price; spot and futures prices; Wavelet coherence; Phase-difference; Time–frequency domain;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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