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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.

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  • 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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    6. 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.
    7. Hou, Yang & Li, Steven & Wen, Fenghua, 2019. "Time-varying volatility spillover between Chinese fuel oil and stock index futures markets based on a DCC-GARCH model with a semi-nonparametric approach," Energy Economics, Elsevier, vol. 83(C), pages 119-143.
    8. Ke Chen & Meng Wang, 2017. "Does Gold Act as a Hedge and a Safe Haven for China’s Stock Market?," IJFS, MDPI, vol. 5(3), pages 1-18, August.
    9. Zhang, Qi & Di, Peng & Farnoosh, Arash, 2021. "Study on the impacts of Shanghai crude oil futures on global oil market and oil industry based on VECM and DAG models," Energy, Elsevier, vol. 223(C).
    10. Xie, Wen-Jie & Wei, Na & Zhou, Wei-Xing, 2023. "An interpretable machine-learned model for international oil trade network," Resources Policy, Elsevier, vol. 82(C).
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    12. Wen-Jie Xie & Na Wei & Wei-Xing Zhou, 2020. "Evolving efficiency and robustness of global oil trade networks," Papers 2004.05325, arXiv.org.
    13. Klein, Tony & Walther, Thomas, 2016. "Oil price volatility forecast with mixture memory GARCH," Energy Economics, Elsevier, vol. 58(C), pages 46-58.

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    More about this item

    Keywords

    Crude oil; Market integration; Nonlinear correlation; Threshold VECM; Volatility transmission;
    All these keywords.

    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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