Modelling Dynamic Conditional Correlations in WTI Oil Forward and Futures Returns

Matteo Manera (), Alessandro Lanza and Michael McAleer

No 2004.72, Working Papers from Fondazione Eni Enrico Mattei

Abstract: This paper estimates the dynamic conditional correlations in the returns on WTI oil one-month forward prices, and one-, three-, six-, and twelve-month futures prices, using recently developed multivariate conditional volatility models. The dynamic correlations enable a determination of whether the forward and various futures returns are substitutes or complements, which are crucial for deciding whether or not to hedge against unforeseen circumstances. The models are estimated using daily data on WTI oil forward and futures prices, and their associated returns, from 3 January 1985 to 16 January 2004. At the univariate level, the estimates are statistically significant, with the occasional asymmetric effect in which negative shocks have a greater impact on volatility than positive shocks. In all cases, both the short- and long-run persistence of shocks are statistically significant. Among the five returns, there are ten conditional correlations, with the highest estimate of constant conditional correlation being 0.975 between the volatilities of the three-month and six-month futures returns, and the lowest being 0.656 between the volatilities of the forward and twelve-month futures returns. The dynamic conditional correlations can vary dramatically, being negative in four of ten cases and being close to zero in another five cases. Only in the case of the dynamic volatilities of the three-month and six-month futures returns is the range of variation relatively narrow, namely (0.832, 0.996). Thus, in general, the dynamic volatilities in the returns in the WTI oil forward and future prices can be either independent or interdependent over time.

Keywords: Constant conditional correlations; Dynamic conditional correlations; Multivariate GARCH models; Forward prices and returns; Futures prices and returns; WTI oil prices (search for similar items in EconPapers)
JEL-codes: C32 G10 Q40 (search for similar items in EconPapers)
Date: 2004-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Journal Article: Modeling dynamic conditional correlations in WTI oil forward and futures returns (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2004.72

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