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A market-augmented model for SIMEX Brent crude oil futures contracts

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  • John Sequeira
  • Michael McAleer

Abstract

Brent crude oil futures contracts are traded on both the Singapore International Monetary Exchange (SIMEX) and the International Petroleum Exchange (IPE). Through a mutual offset system between SIMEX and IPE, Brent crude oil futures contracts can be traded up to nineteen hours each day. The inter-relationship between the two futures contracts, the spot price of Brent crude oil and the riskfree interest rate, suggest the existence of cointegration among SIMEX Brent crude oil futures prices, lagged IPE Brent crude oil futures prices, Brent spot prices and the London Inter-bank Offer Rate (LIBOR). Error-correction representations of two standard futures pricing models, namely the unbiased expectations and cost-of-carry hypotheses, are formulated for SIMEX Brent crude oil futures contracts. These formulations are augmented by including the lagged IPE futures price in the mispricing error. The resulting Augmented Unbiased Expectations Hypothesis (AUEH) and the Augmented Cost-of-Carry (ACOC) models are estimated and tested against each other, and also against the standard unbiased expectations and cost-of-carry models, using nested and non-nested testing procedures. Forecasting comparisons are also made among the various models and the autoregressive integrated moving average models fitted to SIMEX Brent crude oil futures prices. Results from the nonnested tests and the forecasting criteria show clearly that the augmented models outperform their standard (non-augmented) counterparts.

Suggested Citation

  • John Sequeira & Michael McAleer, 2000. "A market-augmented model for SIMEX Brent crude oil futures contracts," Applied Financial Economics, Taylor & Francis Journals, vol. 10(5), pages 543-552.
    • Handle: RePEc:taf:apfiec:v:10:y:2000:i:5:p:543-552
    DOI: 10.1080/096031000416424
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    Cited by:

    1. Clinton Watkins & Michael McAleer, 2003. "Pricing of Non-ferrous Metals Futures on the London Metal Exchange," CIRJE F-Series CIRJE-F-213, CIRJE, Faculty of Economics, University of Tokyo.
    2. Mamatzakis, E & Remoundos, P, 2010. "Threshold Cointegration in BRENT crude futures market," MPRA Paper 19978, University Library of Munich, Germany.
    3. Riza Emekter & Benjamas Jirasakuldech & Peter Went, 2012. "Rational speculative bubbles and commodities markets: application of duration dependence test," Applied Financial Economics, Taylor & Francis Journals, vol. 22(7), pages 581-596, April.
    4. Maslyuk, Svetlana & Smyth, Russell, 2009. "Cointegration between oil spot and future prices of the same and different grades in the presence of structural change," Energy Policy, Elsevier, vol. 37(5), pages 1687-1693, May.

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