Examination of Crude Oil Prices Relationships in Spot and Futures Markets Based on the Basis Risk and Crude Oil Inventory: Using GARCH Model

Faridzad, Ali; Mohajeri, Parisa

Volume 2, Issue 5 (10-2011) jemr 2011, 2(5): 75-102 | Back to browse issues page

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Faridzad A, Mohajeri P. Examination of Crude Oil Prices Relationships in Spot and Futures Markets Based on the Basis Risk and Crude Oil Inventory: Using GARCH Model. jemr 2011; 2 (5) :75-102
URL: http://jemr.khu.ac.ir/article-1-256-en.html

Examination of Crude Oil Prices Relationships in Spot and Futures Markets Based on the Basis Risk and Crude Oil Inventory: Using GARCH Model

Ali Faridzad ^*

¹, Parisa Mohajeri²

1- Allemeh Tabatabaei , Alifaridzad@yahoo.com
2- Allemeh Tabatabaei

Abstract: (13363 Views)

The crude oil is both a commodity and a financial asset. As there are many factors affecting the crude oil spot and futures markets, the analysis of the relationship between major factors of these markets is complicated. The main objective of this paper is to investigate the relationship between the price of crude oil in spot and futures market and identify the effect of the crude oil inventory and the interest-adjusted basis risk on these price changes. The monthly data of WTI spot and futures prices, WTI crude oil inventory and interest-adjusted basis risk are from EIA (Energy Information Administration) database. The data period is from January 1986 to December 2010. Due to the unpredictable volatilities and uncertainties in variables, the GARCH error process models are used. Empirical results show that there is a positive, strong and significant relationship between the spot crude oil price changes and futures prices. Additionally, the basis risk changes can affect the spot and futures crude oil prices up to three lags. Also, crude oil inventory changes have a negative effect on the spot crude oil price changes with one lag.

Keywords: Spot Price, Futures Price, Inventory, Adjusted Basis Risk

Full-Text [PDF 1627 kb] (5140 Downloads)

Type of Study: Applicable | Subject: انرژی، منابع و محیط زیست
Received: 2011/08/4 | Accepted: 2012/02/15 | Published: 2011/12/15