Nonlinear joint dynamics between prices of crude oil and refined products

Tao Zhang, Guofeng Ma and Guangsheng Liu

Physica A: Statistical Mechanics and its Applications, 2015, vol. 419, issue C, 444-456

Abstract: In this paper, we investigate the relationships between crude oil and refined product prices. We find that nonlinear correlations are stronger in the long-term than in the short-term. Crude oil and product prices are cointegrated and financial crisis in 2007–2008 caused a structural break of the cointegrating relationship. Moreover, different from the findings in most studies, we reveal that the relationships are almost symmetric based on a threshold error correction model. The so-called “asymmetric relationships” are caused by some outliers and financial crisis. Most of the time, crude oil prices play the major role in the adjustment process of the long-term equilibrium. However, refined product prices dominated crude oil prices during the period of financial crisis. Important policy and risk management implications can be learned from the empirical findings.

Keywords: Cross-correlation; Nonlinearity; Cointegration; Threshold error correction model (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:419:y:2015:i:c:p:444-456

DOI: 10.1016/j.physa.2014.10.061

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