The Comovements between Futures Markets for Crude Oil: Evidence from a Structural GARCH Model

Fabrizio Spargoli and Paolo Zagaglia

No 2007:15, Research Papers in Economics from Stockholm University, Department of Economics

Abstract: This paper studies the linkages between the prices of oil futures traded on the New York Mercantile Exchange and the Intercontinental Exchange of London. We estimate a structural BEKK-GARCH model that allows for non-zero correlation between the structural innovations. We identify the structural parameters through restrictions on the reduced-form GARCH model. We find that the oil futures traded on the NYMEX and ICE can be used for mutual hedging purposes only when the structural conditional variances of both innovations are modest and, as such, no turbulent events have taken place. Periods with positive structural correlations are instead associated with peaks in the structural conditional variance of both innovations. During times of market turmoil, the structural variance of the returns on NYMEX futures becomes larger than that of ICE futures. This means that, when there are common shocks to both markets, the NYMEX reacts more strongly than the ICE. Our empirical evidence explains the negative reduced-form correlation between the two returns which is observed in turbulent periods.

Keywords: oil prices; futures markets; GARCH; structural VAR (search for similar items in EconPapers)
JEL-codes: C22 G19 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2007-08-14
New Economics Papers: this item is included in nep-ene and nep-rmg
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:sunrpe:2007_0015

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