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The Dynamics of Crude Oil Spot and Futures Markets

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Energy Economics and Financial Markets

Abstract

This chapter centers on the question of whether futures markets can be used in the competitive price discovery in crude oil markets. On the one hand, the survey in this chapter uncovers considerable evidence on the theoretical perspective that future prices of crude oil is equal to the spot price of crude oil, plus the cost of carry plus the endogenous convenience yield. On the other hand, through the empirical findings built on the Alquist and Kilian (2010) model, this chapter concurs with the previous studies documenting that futures crude oil prices are uninformative for forecasting spot crude oil prices.

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Notes

  1. 1.

    West Texas Intermediate (WTI) is a grading system for crude oil to be used as a benchmark in crude oil pricing and it is the underlying commodity of crude oil futures contracts in the Chicago Mercantile Exchange.

  2. 2.

    For a detailed discussion on the differences, see (Routledge et al. 2000).

  3. 3.

    See, among others, (Carlson et al. 2007).

  4. 4.

    It must be noted that, through a reduced-form model, Casassus and Collin-Dufresne (2005) show that when the spot price is high, the convenience yield is high as well and hence pushes the spot price back toward a long-term mean. However this conclusion is derived under the assumption of risk neutrality.

  5. 5.

    τ = T−t.

  6. 6.

    It is pointed out by Alquist et al. (2011) that it is possible to obtain qualitatively similar results by using Brent spot and future prices. Vansteenkiste (2011) also indicates that modeling based on prices of WTI and those of Brent should not substantially affect the analysis although these two prices do not fluctuate in line with one another over time.

  7. 7.

    For details see Elliott and Timmermann (2008) and Alquist et al. (2011).

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Authors and Affiliations

  1. Department of Finance, University of Illinois at Chicago, University Hall, 601 South Morgan, Chicago, IL, 60607, USA

    Özgür Arslan-Ayaydin

  2. Department of Finance, Hacettepe University, University Hall, 601 South Morgan, Chicago, IL, 60607, USA

    Özgür Arslan-Ayaydin

  3. Department of Information and Decision Sciences, University of Illinois at Chicago, University Hall, 601 South Morgan, Chicago, IL, 60607, USA

    Inna Khagleeva

Authors
  1. Özgür Arslan-Ayaydin
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  2. Inna Khagleeva
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Correspondence to Özgür Arslan-Ayaydin .

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Editors and Affiliations

  1. , Department of Finance, VU University Amsterdam, De Boelelaan 1105, Amsterdam, 1081 HV, Netherlands

    André Dorsman

  2. Curtin Business School, School of Economics and Finance, Curtin University, Hayman Road, Bentley, Perth, 6845, West Australia, Australia

    John L. Simpson

  3. Faculty of Economics and Business, Economics, Econometrics and Finance, University of Groningen, Nettelbosje 2, Groningen, 9747 AE, Groningen, Netherlands

    Wim Westerman

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Arslan-Ayaydin, Ö., Khagleeva, I. (2013). The Dynamics of Crude Oil Spot and Futures Markets. In: Dorsman, A., Simpson, J., Westerman, W. (eds) Energy Economics and Financial Markets. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-30601-3_9

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  • DOI: https://doi.org/10.1007/978-3-642-30601-3_9

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