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Do oil spot and futures prices move together?*

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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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    Replication

    This item has been replicated by:
  • Holmes, Mark J. & Otero, Jesús, 2019. "Re-examining the movements of crude oil spot and futures prices over time," Energy Economics, Elsevier, vol. 82(C), pages 224-236.

    • More about this item

    Keywords

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

    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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    1. Do oil spot and futures prices move together? (Energy Economics 2015) in ReplicationWiki

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