Analyzing Crude Oil Spot Price Dynamics versus Long Term Future Prices: A Wavelet Analysis Approach

Josué M. Polanco-Martínez and Luis M. Abadie
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Josué M. Polanco-Martínez: Basque Centre for Climate Change—BC3, Edificio Sede No. 1, Planta 1ª, Basque Country University Science Park, 48940 Leioa, Spain
Luis M. Abadie: Basque Centre for Climate Change—BC3, Edificio Sede No. 1, Planta 1ª, Basque Country University Science Park, 48940 Leioa, Spain

Energies, 2016, vol. 9, issue 12, 1-19

Abstract: The West Texas Intermediate (WTI) spot price shows high volatility and in 2014 and 2015 when quoted prices declined sharply, long-term prices in future markets were less volatile. These prices are different and diverge depending on how they process fundamental and transitory factors. US tight oil production has been a major innovation with significant macroeconomic effects. In this paper we use WTI spot prices and long-term futures prices, the latter calculated as the expected value with a stochastic model calibrated with the futures quotes of each sample day. These long-term prices are the long-term equilibrium value under risk neutral measurement. In order to analyze potential time-scale relationships between spots and future, we perform a wavelet cross-correlation analysis using a novel wavelet graphical tool recently proposed. To check the direction of the causality, we apply non-linear causality tests to raw data and log returns as well as to the wavelet transform of the spot and futures prices. Our results show that in the spot and futures markets for the period 24 February 2006–2 April 2016 there is a bi-directional causality effect for most time scales (from intra-week to biannual). This suggests that spot and futures prices react simultaneously to new information.

Keywords: oil spot prices; futures oil markets; stochastic model; tight oil; time series analysis; wavelet correlation; Maximal Overlap Discrete Wavelet Transform (MODWT); nonlinear causality test (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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