Title: Long memory and fractional cointegration relationship between physical and financial oil markets
Authors: Achraf Ghorbel; Nessim Souissi
Addresses: Laboratory URECA, Faculty of Economics and Management of Sfax, Street of airport, km 4.5, LP 1088, Sfax 3018, Tunisia ' Laboratory URECA, Faculty of Economics and Management of Sfax, Street of airport, km 4.5, LP 1088, Sfax 3018, Tunisia
Abstract: This paper investigates the relationship between spot-future oil volatility by examining the empirical evidence for the aspect followed by two process volatility. The analysis is undertaken using daily from January 2007 to March 2012 at the New York Mercantile Exchange (NYMEX) and International Petroleum Exchange (IPE). There is as yet little consensus on the methodology to test the fractional cointegration in crude oil markets. We consider semi-parametric frequency domain analysis of fractional cointegration between long memory processes. The estimation of predictive regression narrow band least square (NBLS) is based on the Fourier frequency number included in the spectral regression. Consistent with exploration the Geweke and Porter-Hudak (GPH) and local Whittle estimators, the results notice the non-stationary long memory in spot-future oil volatility and the mean reverting behaviour. An application to NBLS model, we indicate that futures oil volatilities are a consistent estimate of spots oil volatilities. The contribution of this paper is to demonstrate that oil futures prices display long memory and that form of long memory is persistence over the study period of 2007-2012 and proves the inter-relationship between financial and physical oil markets.
Keywords: spot-future oil volatility; long memory; persistence; fractional cointegration; mean reverting; narrow band least squares; NBLS; Geweke and Porter-Hudak; GPH; local Whittle; oil futures; futures prices; crude oil markets; financial oil markets; physical oil markets.
International Journal of Bonds and Derivatives, 2016 Vol.2 No.2, pp.133 - 151
Received: 21 Sep 2015
Accepted: 20 Nov 2015
Published online: 19 Jun 2016 *