The relationship between crude oil spot and futures prices: Cointegration, linear and nonlinear causality
- ISSN: 01409883
- DOI: 10.1016/j.eneco.2008.03.006
The present study investigates the linear and nonlinear causal linkages\n\nbetween daily spot and futures prices for maturities of one, two,\nthree\n\nand four months ofWest Texas Intermediate (WTI) crude oil. The data\n\ncover two periods October 1991�October 1999 and November 1999�\n\nOctober 2007, with the latter being significantly more turbulent.\nApart\n\nfrom the conventional linear Granger test we apply a new\n\nnonparametric test for nonlinear causality by Diks and Panchenko\n\nafter controlling for cointegration. In addition to the traditional\n\npairwise analysis, we test for causality while correcting for the\neffects\n\nof the other variables. To check if any of the observed causality\nis\n\nstrictly nonlinear in nature, we also examine the nonlinear causal\n\nrelationships of VECM filtered residuals. Finally, we investigate\nthe\n\nhypothesis of nonlinear non-causality after controlling for conditional\n\nheteroskedasticity in the data using a GARCH-BEKK model. Whilst the\n\nlinear causal relationships disappear after VECM cointegration\n\nfiltering, nonlinear causal linkages in some cases persist even after\n\nGARCH filtering in both periods. This indicates that spot and futures\n\nreturns may exhibit asymmetric GARCH effects and/or statistically\n\nsignificant higher order conditional moments. Moreover, the results\n\nimply that if nonlinear effects are accounted for, neither market\nleads\n\nor lags the other consistently, videlicet the pattern of leads and\nlags\n\nchanges over time.