Cointegration in the Market Cointegration in the Market for Crude - - PowerPoint PPT Presentation

Cointegration in the Market Cointegration in the Market for Crude with Structural for Crude with Structural Breaks Breaks

‘Wo rk in pro gre ss’

Neil A. Wilmot Assistant Professor Department of Economics University of Minnesota Duluth USAEE Austin TX Nov 4 – 6, 2012

Introduction Introduction

• Oil market has become a ‘global pool’
• Literature that examines the co-movements among

various types of crude oil.

• Gulen(1999), Ewing and Harter (2000) Bentzen

(2007)

• Kao and Wan (2012)

“Benchmark status” and “decoupling” of WTI

• Kaufmann and Ullman (2009)

“Most analyst agree the world oil market is unified”

Monthly Crude Prices Monthly Crude Prices

Methodology Methodology

Cointegration tests with structural break:

• Based on the Gregory and Hansen (1996) residual

based cointegration test which accounts for possible regime change

• Maslyuk and Smyth (2009)

examine cointegration among crude oil spot and futures prices in the presence of a structural break

Methodology Methodology

• Engle and Granger (1987)

Endogenous structural breaks:

• Model C :
• Model C/T:
• Model C/S:

1 2 t t t

y y e μ α = + +

1 1 2 2 t t t t

y y e

τ

μ μ φ α = + + +

1 1 2 2 t t t t

y t y e

τ

μ μ φ β α = + + + +

1 1 2 1 2 2 2 t t t t t t

y y y e

τ τ

μ μ φ α α φ = + + + +

Data Data

• Monthly spot crude oil prices
• January 1986 through June 2012
• WTI, Edmonton, WCS
• 318 observations
• Daily spot crude oil prices
• January 2000 through June 2012;
• WTI, Edmonton, WCS
• 3135 observations

Unit root test (Daily) Unit root test (Daily)

Results of traditional unit root tests (ADF, PP, KPSS)

• Find WTI (levels) nonstationary
• ΔWTO stationary
• Canadian oil prices
• Edmonton Par nonstationary
• ΔEDM stationary
• WCS nonstationary
• ΔWCS stationary

Unit Root Test (Monthly) Unit Root Test (Monthly)

Results of traditional unit root tests (ADF, PP, KPSS)

• Find WTI and Brent nonstationary
• ΔWTO stationary
• Canadian oil prices
• Edmonton Par nonstationary (no trend)
• ΔEdm stationary
• WCS nonstationary (no trend)
• ΔWCS stationary

Unit Root Test Unit Root Test

• LM Test With One Structural Break

Cointegration Test Results Cointegration Test Results

Monthly ADF Zt Test Statistic Break Date Test statistic Break point Spot Edmonton and Spot WTI Model C ‐8.3504* 07/2008 ‐7.8014* 07/2008 Model C/T ‐8.8967* 07/2008 ‐7.8029* 07/2008 Model C/S ‐9.1027* 03/2008 ‐7.7109* 11/2007 Spot Edmonton and Spot WCS Model C ‐7.2557* 12/2007 ‐7.6073* 3/2008 Model C/T ‐6.4310* 04/2008 ‐7.3499* 11/2007 Model C/S ‐6.5189* 04/2008 ‐7.3499* 11/2007

Cointegration Test Results Cointegration Test Results

Monthly ADF Zt Test Statistic Break Date Test statistic Break point Spot WCS and Spot WTI Model C ‐8.7698* 12/2007 ‐7.6038* 09/2007 Model C/T ‐8.4369* 12/2007 ‐7.5023* 09/2007 Model C/S ‐8.9042* 12/2007 ‐7.6265* 09/2007

Cointegration Results Cointegration Results

• Monthly

Cointegration Test Results Cointegration Test Results

Daily ADF Zt Test Statistic Break Date Test statistic Break point Spot Edmonton and Spot WTI Model C ‐6.5441* 07/30/2007 ‐10.3655* 07/12/2007 Model C/T ‐9.7629* 03/21/2002 ‐11.1609* 05/26/2004 Model C/S ‐10.173* 12/05/2005 ‐10.7388* 10/13/2005 Spot Edmonton and Spot WCS Model C ‐13.011* 03/03/2008 ‐13.7573* 02/15/2008 Model C/T ‐12.671* 03/03/2008 ‐13.3642* 04/10/2008 Model C/S ‐12.444* 02/21/2008 ‐12.7511* 02/21/2008

Cointegration Test Results Cointegration Test Results

Daily ADF Zt Test Statistic Break Date Test statistic Break point Spot WCS and Spot WTI Model C ‐8.9675* 10/25/2004 ‐10.3444* 10/25/2004 Model C/T ‐11.4316* 03/04/2008 ‐11.6131* 04/10/2008 Model C/S ‐11.4377* 03/04/2008 ‐11.6633* 02/15/2008

Results Results

• Crude spot prices of the same grade are

cointegrated

• Crude spot prices of different grades are

cointegrated

• Does not appear to be a prevailing time for a

common structural break in oil markets