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. o Gulen(1999), Ewing and Harter (2000) Bentzen (2007) o Kao and Wan (2012) “Benchmark status” and “decoupling” of WTI o 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) = μ + α + y y e 1 2 t t t Endogenous structural breaks: = μ + μ φ + α + • Model C : y y e τ 1 1 2 2 t t t t = μ + μ φ + β + α + • Model C/T: y t y e τ 1 1 2 2 t t t t = μ + μ φ + α + α φ + • Model C/S: y y y e τ τ 1 1 2 1 2 2 2 t t t t t t

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

Unit root test (Daily) Unit root test (Daily) Results of traditional unit root tests (ADF, PP, KPSS) o Find WTI (levels) nonstationary o Δ WTO stationary • Canadian oil prices o Edmonton Par nonstationary o Δ EDM stationary o WCS nonstationary o Δ WCS stationary

Unit Root Test (Monthly) Unit Root Test (Monthly) Results of traditional unit root tests (ADF, PP, KPSS) o Find WTI and Brent nonstationary o Δ WTO stationary • Canadian oil prices o Edmonton Par nonstationary (no trend) o Δ Edm stationary o WCS nonstationary (no trend) o Δ WCS 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