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Published on: February 21, 2017
Cointegration between oil spot and future prices of the same and different grades in the presence of structural
Svetlana Maslyuk1, Russell Smyth1
1Department of Economics, Monash University, 900 Dandenong Road, Caulfield East, 3145 Victoria, Australia.
Abstract:
The purpose of this study is to examine whether crude oil spot and futures prices of the same and different grades are cointegrated using a residual-based cointegration test that allows for one structural break in the cointegrating vector and high-frequency data. We choose the US WTI and the UK Brent as the representative crudes for this analysis since these two crudes have well-established spot and futures markets. We find that spot and future prices of the same grade as well as spot and futures prices of different grades are cointegrated. We examine potential causes of structural change as revealed by the cointegration test in terms of events that have impacted on world oil markets as well as discuss the implications of the results for hedge managers, investors and regulators.
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