Determination of Causality in Prices of Crude Oil

Salman Sarwat, Muhammad Kashif, Muhammad Aqil and Farhan Ahmed
Additional contact information
Salman Sarwat: Barret Hodgson University, Karachi, Pakistan,
Muhammad Kashif: Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Karachi, Pakistan,
Muhammad Aqil: Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Karachi, Pakistan,
Farhan Ahmed: NED University of Engineering and Technology, Karachi-Pakistan.

International Journal of Energy Economics and Policy, 2019, vol. 9, issue 4, 298-304

Abstract: Price determination through demand and supply forces is the most efficient pricing mechanism. But, these forces should be real rather than artificial. Speculative trade creates artificial market forces, which bounds to disturb real economy. It is argued that the demand and supply forces are primarily driven by speculation rather than fundamentals in the presence of commodity derivatives. The aim of this study is to empirically test this argument through causality analyses. Crude oil and USA has been selected as a typical case. Daily spot prices of west texas intermediate crude oil and future prices from New York Mercantile Exchange from January 2nd, 1986 to March 6th, 2017 has been analyzed. Granger causality test and vector error correction model are applied to find out the causal relationship between spot and futures prices. Results show that causality runs from runs from crude oil futures to spot prices, crude oil is just one of the numerous commodities, , which are being speculatively traded through derivatives.

Keywords: Causality Analysis; Crude Oil Pricing; Futures; Spot Prices; Vector Error Correction Model (search for similar items in EconPapers)
JEL-codes: D40 D49 E44 F01 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.econjournals.com/index.php/ijeep/article/download/7724/4450 (application/pdf)
https://www.econjournals.com/index.php/ijeep/article/view/7724/4450 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eco:journ2:2019-04-37

Access Statistics for this article

International Journal of Energy Economics and Policy is currently edited by Ilhan Ozturk

More articles in International Journal of Energy Economics and Policy from Econjournals
Bibliographic data for series maintained by Ilhan Ozturk ().