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OIL PRICE DETERMINANTS AND CO-MOVEMENT DYNAMICS
A THESIS
submitted by
SRINIVASAN.N
for the award of the degree
of
MASTER OF SCIENCE
(By Research)
DEPARTMENT OF MANAGEMENT STUDIES
INDIAN INSTITUTE OF TECHNOLOGY MADRAS, INDIA
FEB, 2016
THESIS CERTIFICATE
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This is to certify that the thesis titledOIL PRICE DETERMINANTS AND CO-MOVEMENT
DYNAMICS, submitted by Srini!"!n.N, to the Indian Institute of Technology Madras,
Chennai for the award of the degree of M!"#$r %& S'i$n'$ ()* R$"$!r'+, is a bonafide record of
the research work done by him under my superision! The contents of this thesis, in full or in
parts, hae not been submitted to any other Institute or "niersity for the award of any degree or
diploma!
Pr%&. M. T+$n%+i
Research #uide
$rofessor
%ept! of Management &tudies $lace' Chennai
IITMadras, ** *+ %ate'
2
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AC/NOLEGDMENTS
I would like to epress my sincere gratitude to $rof! M! Thenmo-hi for guiding me throughout
my research work! I would also like to thank my #eneral Test Committee members, %r! $!
.rishna $rasanna and %r! "ma.anth %ash for their insightful comments! I would also like to
thank $rof! T!/! .amalanabhan for his aluable suggestions! I would like to thank all the faculty
of the %epartment of Management &tudies for helping me to gain knowledge through their
teaching! I would like to thank all the staff of the %epartment of Management &tudies,
0enkatraman &ir, Ra1endran &ir and 0asudean &ir for all their help and support! I would also
like to thank Meenakshi Ma2am and 3-har for their help in the systems lab! I would like to thank
&reeniasan and all the other staff of the %epartment!
My #randmother, Mrs! 3!.! Thayaramma and my parents, 4ate Mrs! Reathi 5arasimhan and
Mr! 0! 5arasimhan, and my brother Mr! 5! Raghuraman hae always supported me to pursue
higher studies, and stood by me throughout and also helped me to go forward in academics! 5o
amount of thanks would coney my gratitude for them!
I would like to thank &hyaam, &hipra, 4akshmi akka, 3bhi1eeth &ir, 5arend &ir, &hashank,
.ayal akka, 6ema for making my stay most memorable! I would like to thank my friends in the
department &umeet, &halini, #iri sir, sharoon for their support!
Srini!"!n.N
ABSTRACT
3
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.eywords 7 Crude oil 7 &peculation 7 Marko Regime &witching Model 7 &tock market 7 8change rate 7 Co
moement 7 9aelet 3nalysis 7 Continuous waelet transform
This study inestigates the impact of fundamental, financial and speculatie factors on crude oil
prices and analy-es the behaior of the arious determinants with respect to regimes! Thefundamental factors included in the study are :$8C production, :8C% stocks, :8C%
consumption, :8C% 5et Imports, industrial production of China (in ;) and industrial production
of India (in ;)! ** and tradeweighted
"& dollar Inde and the speculatie component is captured using net long positions of non
commercial traders! The study is conducted oer the period 3pril ?@@> to May A*?! Marko
regimeswitching model is used analy-e the impact as it captures both non linearity and breaks!
:ur empirical findings indicated that speculation affects the oil price positiely in higholatile
state and has inerse effect in lowolatile state! 3t lowolatility regimes, fundamental, financial
factors hae significant impact on the oil price, whereas at high olatility regimes, speculation
has a significant effect on the oil price!
The study further inestigated the relationship of oil price with echange rate and stock market
by eamining the comoement between oil price and echange rate of nine oil importing
countries stock market indices of fifteen ma1or oil importing countries! The differ from preious
studies as the study eamines the macroeconomic dynamics of ma1or oilimporting countriesduring arious economic cycles across different freDuencies! The study includes fifteen ma1or oil
importing countries oer the period A**+?! 9aelet Coherence analysis is used to etract the
coherency! 8mpirical results indicate a high coherence between oil price and macroeconomic
indicators across all the countries during the financial crisis! The echange rates hae negatie
relationship with benchmark oil prices ecept for the echange rate of /apan in the long run and
for the echange rate of &outh .orea in the medium run! &tock indices hae positie
relationship with benchmark oil prices in both long and medium run! &=$ is leading the oil
price, whereas &&8>*, 5ikkei AA>, 5I
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macroeconomic indicators are obsered to change across freDuency and time! 8change rate
offers diersification benefits, but stock market indices proide no diersification aenues since
the pattern of comoement of stock market indices and oil prices are similar across all oil
importing countries!
The study has implications for regulators and policymakers! The study contributes to the
literature in the field of oil price determination and coherency of oil price with macroeconomic
indicators! The study used nominal price instead of real price to proide insight for traders and
institutional inestors! The results aid the indiidual traders and institutional inestors in
designing their portfolio for short, medium and long term time hori-ons!
TABLE OF CONTENTS
3C.5:948#%M85T&!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! iii
5
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3B&TR3CT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! i
4I&T :< T3B48&!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!iii
4I&T :<
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+!?! Introduction!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!+@
+!A 4iterature ReiewJJJJJJJJJJJJJJJJJJJJJJJJJJJJ!!!!!*
+!+! %ata!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!?
+! Conceptual flowJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ A
+!> MethodologyJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ+
+!>!?! Continous waelet transform!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!?
+!A!A! 9aelet Coherence (9TC)!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!?
+!! 9aelet coherence InferenceJJJJJJJJJJJJJJJJJJJJJJJJJ!! +
+!H! 8mpirical ResultsJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ!!
+!H!?! Relationship between benchmark oil price and echange rate of oil importing countries!! !
+!H!A! Relationship between benchmark oil price and stock indices of oil importing countries! !!!@
+!! &ummary!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!?
CHAPTER CONCLUSION!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!@
!? ?
!?!>! :il price and stock indices' 9TCJJJJJJJJJJJJJJJJJJJJJJ!>A
!A! Conclusions!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!@@
!+! Contributions of the study!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!?*1
!! Implications!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!?*?
!>! 4imitations of the study!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!?*A
R8
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LIST OF TABLES
T!)7$" Ti#7$ P!8$ N%.
?!? 8nergy Market &hare!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
?!A $roed reseres of oil at the end of A*?+!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
?!+ %ata %escription!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
?! 8nergy rate %ata!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
?!> &tock inde data!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
A!? &ummary of literature on determinants of crude oil!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
A!A %ata %escription!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
A!+ %escriptie statistics of fundamental, financial and speculatie ariables!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
A! B%& test results!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
A!> 8stimation results of Marko Regime &witching Regression ? !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
A! 8stimation results of Marko Regime &witching Regression A!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
A!H 8stimation results of Marko Regime &witching Regression +!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
+!? Recent literature on relationship between the oil price and echange rate!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
+!A Recent literature on relationship between the oil price and stock indices!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
+!+ %escriptie statistics of echange rates of oil importing countries!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
+! %escriptie statistics of stock indices of oil importing countries!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
+!H Relationship during financial crisis!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!? &ummary of hypothesis results!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
8
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LIST OF FIGURESFi89r$" Ti#7$ P!8$ N%.
?!? Conditional means, 0olatilities and &moothed transition probabilities for model ? !!!!!!!!!!!!!!
A! Conditional means, 0olatilities and &moothed transition probabilities for model A!!!!!!!!!!!!!!!
A!H Conditional means, 0olatilities and &moothed transition probabilities for model + !!!!!!!!!!!!!!
+!? Ma1or oil importing countries!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
+!A 5ormali-ed oil price and echange rate of oil importing countries!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
+!+ 5ormali-ed oil price and stock indices of oil importing countries !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
+! Benchmark oil prices and echange rates 7 9aelet coherence (9TC)!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
+!> Benchmark oil prices and stock indices 7 waelet coherence (9TC)!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
9
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ABBREVIATIONS
inde
5I 4G> inde (Indonesia)
.:&$I .orea Composite &tock $rice Inde (&outh .orea)
10
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IB8F IB8F +> (&pain)
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C+!:#$r 1
In#r%;9'#i%n
Crude oil constitutes a ma1or part in the world energy markets and supplies +* percent of the
total world energy consumption and @* percent of the ehicular fuel consumption! &eeral
countries in the world are either producers or consumers of crude oil! 6ence, it is the key drier
of a nation2s economy and it also triggers economic cycles! Instability in oil price affects both
deeloped as well as deeloping countries and olatility in oil price leads to potential
ramifications oer a country2s economy and its financial markets!
$reious research has focused more on the impact of demand and supply factors influencing oilprice! But oil is one of the highly traded commodities in the world with high participation from
financial institutions in the deriatie segment and speculation in crude oil options and futures
can play an actie role in establishing the price of crude oil! $recise estimation of the factors that
affect the crude oil price helps in understanding the dynamics of crude oil price moements and
helps in managing the risk pertaining to olatile oil prices! :il price series ehibit structural
breaks and nonlinearity (Reboredo, A*?*) and may ehibit dynamic behaior with respect to the
financial eents such as crisis, changes in goernment policy, changes in the business cycles and
economic downturns! The economy becomes more difficult to manage when oil prices remain
highly olatile, as higher olatility in crude oil prices, hae greater ramifications for different
players in the economy and managing current account balance for goernments becomes a
challenge! The determinants of crude oil price in higholatile period might be different from
lowolatile period, and may differ during different economic phases! 6ence, an attempt is made
in this study to eamine the effect of fundamental, financial and speculatie factors on crude oil
prices during high and low olatile regimes!
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company or indirectly by affecting the interest rate that is used to discount the future cash flows
of a company! Change in stock prices and echange rates also impacts oil prices! But, the nature
and etent of relationship between oil price and macroeconomic indicators may ary from time
to time and understanding the pattern of relationship across time and freDuency hori-on becomes
essential for traders and inestors! 6ence, we attempt to eamine the comoement between (i)
oil price and stock inde and (ii) oil price and echange rate to capture the pattern of relationship
across different time hori-on!
E'%n%i' 8r%
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The aboe table presents the ma1or fuel resources of the world! The annual increase in the supply of each fuel is
presented! It also shows the current and forecasted share of each fuel in world energy market!
9orld oil reseres as indicated in the B$ &tatistical Reiew of 9orld 8nergy (/une A*?) report
is presented in Table ?!A! $roed reseres of oil are the estimated Duantities of oil that are
obtained from geological and engineering information! These reseres are indicated with
reasonable accuracy and can be recoered in the future from known reseroirs under eisting
economic and operating conditions! $roed reseres in the world at the end ?@@+, A**+, and
A*?+ is indicated in the table! It also presents the total Duantity in terms of both tones and barrels
and the share of world reseres of ma1or oil producing nations!
T!)7$ 1.2 Pr%$; R$"$r$" %& %i7 !# #+$ $n; %& 201
$roed reseres of oil 8nd of A*?+
9orldReseres
?@@+(Thousandmillionbarrels)
A**+(Thousandmillionbarrels)
A*?+(Thousandmillionbarrels)
Thousandmilliontones
thousandmillionBarrels
share ofworld
Reseres productionratio
:8C% ?*! AH!> A@! +H!+ A! ?!H* ++!A
5on:8C% @**! ?*! ?+H!H A**!@ ?+@!? >!+* >@!>
:$8C HH!@ @?A!? ?A?+! ?H*!A ?A?!A H?!@* @*!+
5on:$8CN A*!+ +A>!A +A! >*!? +?!@ A*!+* A
8uropean "nionO !? ! *!@ ! *!* ?+
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affects both deeloped as well as deeloping countries! 0olatility in the oil price leads to
potential ramifications oer a country2s economy and its financial markets!
8conomic recessions, inflation upsurge, and trade deficits are due to the large moements in oil
price! $rice of crude oil in A**+ was at ;A@ a barrel! in A*??! The price was stable at ;?*> per barrel from A*?? to A*?! %r Oi7 Pri'$ S+%'="
The ma1or eents that led to ma1or oil price shocks after the 9orld9arII include the &ue- Crisis
of ?@>7?@>H, the :$8C oil embargo of ?@H+7?@H, the Iranian reolution of ?@H7?@H@, the
Iran7IraD 9ar initiated in ?@*, the first $ersian #ulf 9ar in ?@@*@?, and the oil price spike of
A**H7A** (6amilton, A*??)!
In the initial postwar era, Teas Railroad Commission (TRC) played an important role in the
world oil market! The permissible production leel was set by TRC based on the current market
demand! 3s a result, the nominal oil price was constant from month to month! "nepected
ariations in the oil price were witnessed during the etreme eents!
S9$ Cri"i" (1?@61?@' The president of 8gypt, 5asser, has nationali-ed the &ue- Canal in
?@>! To counteract the 8gyptian president, Brittan and million barrels of oil per day was transported! It constitutes twothird of the total
Brittan oil supplies! &upply disruption during this period led to sharp increase in oil price during
the &ue- Crisis!
OPEC E)!r8% (1?1?3rab members of :$8C etended their support to Israel against
&yria and 8gypt by announcing an embargo on oil eports only to selected countries! 3s a result,
15
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:$8C has cut its total oil production which led to shortfall of world oil output by H!>! %ue to
this the #ulf countries doubled the price of oil in ?@H! #eopolitical factors played a ma1or role
in price spike during this period!
Ir!n r$%79#i%n (1?1?? In order to fill the gap in the oil production due to 3rab :$8C
member2s embargo, Iran increased its total oil production during the ?@H+7?@H!But, in ?@H,
Iran was contended with large public protests which spread to the oil sector! The total oil
production of Iran fell down by ! million barrels per day which constituted H of world
production at the time, led to a price hike during ?@H7?@H@!
Ir!nIr! !r (1?01?1 The oil supply from both the countries was lost during the war
between Iran and IraD in ?@*! The total production loss accounted to about of world oil
production at the time! 6oweer, this short fall in production was recoered from the other parts
of the world with in a ery short span!
T+$ 8r$!# :ri'$ '%77!:"$ (1?11?6 The oil demand of ma1or oil importing countries
declined due to the price hike in ?@H*! The nominal oil price fell by A> by ?@*! &audi 3rabia
has cut its threefourth of its production during ?@? and ?@>! But this did not improe the price
of oil! In ?@, &audis lifted its production cuts! This led to a further collapse in oil price from
;AHbarrel in ?@> to ;?Abarrel in ?@! This was promising for oil importing countries but foroil eporting countries this was the ma1or shock!
P$r"i!n G97& !r (1??01??1 In ?@@*, IraD inaded .uwait! The oil production from both
countries accounted for @ of the total world oil production was lost during the war! The price of
crude oil was doubled during this time! But, this spike sustained for ery short span!
E!"# A"i!n Cri"i" (1??1?? In the mid of ?@@H, &outh .orea, Thailand, and some other
3sian countries were sub1ected to financial stress! The price of oil soon followed their downfall
since ma1or oil demand was from these countries! The price of oil has fallen below ;?A a barrel
by the end of ?@@!
G7%)!7 Fin!n'i!7 Cri"i" (200200 #lobal economy was booming during A** and A**>!
#rowth in economy led to an increase in world oil consumption by > million barrels per day! 3s
16
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a result oil price increased rapidlyP the oil production slowly declined after A**>! The low
production further added to the increase in the oil price during the global financial crisis!
P79n8$ in %i7 :ri'$ (201 4ongterm trend in oil prices was determined by demand and supply
factors! &hortterm moements are eplained using market sentiment and epectations!
#eopolitical risks, supply disruptions, and production controls eercised by :$8C led to sharp
decline of oil price from ;?*> per barrel! This decline was intensified due to policy change by
:$8C! In A*?, due to geopolitical conflicts in some oil producing countries, :$8C announced
its policy change which led to the appreciation of the "& dollar! Chen (A*?>) postulated that oil
prices remain low in A*?> and will rise in A*? marginally! 4ongterm trend of oil production
and consumption hae also played crucial roles in the recent decline in oil prices!
1.2 D$#$rin!n#" %& 'r9;$ %i7
The dynamics of oil price has receied much attention since the oil market witnessed rapid
moements in its price! :il price from ;A@ a barrel in A**+ rose to ;?++ a barrel in A** and
hae fallen again to ;+H a barrel in A*?>! &ome studies argue that the fluctuations in oil price
were due to the structural transformations in oil market! :ther studies attributed this behaior to
the seasonal and cyclical behaior of oil price! &teens (A**>) postulated that these different
iews about the olatility in oil price reflect the diergent iews of the future change in oilprices!
$reious studies on oil price studied basic correlations, causality relations, or economic linkages
to oil price! But, these shortterm relationships cannot adeDuately capture the different shocks
that influence the oil market! 3nd the longterm models are etremely sensitie to the underlying
assumptions of the models!
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sources of supply of crude oil are non:$8C nations and :$8C nations! There is a sudden
increase in non:$8C production during A*?* crisis!
The association between the fundamental factorsQdemand and supply and the oil price was
approimated using a linear relationship in the most of the studies! But, nonlinear relationship
eists between the determinants of crude oil price and the olatility of crude oil price! It is
imperatie to accurately estimate the determinants of crude oil price using a nonlinear model!
3ccording to the International 8nergy 3gency report A*?, the growth in the world demand for
oil was approimately A per year oer the last two decadesP whereas the oil price fluctuation
per year is way aboe A! This imbalance can be eplained using the factors other than
fundamental factors! The other factors include speculatie factors, financial factors, and supply
disruption factors! 6ence, the present study inestigates the fundamental, financial, and
speculatie factors that eplain the olatility in crude oil price!
1. In#$r-r$7!#i%n"+i: )$#
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prices and emerging stock markets (Basher and &adorsky, A**P 6ammoudeh and 3leisa, A**P
6ammoudeh and 6uimin, A**>)!
.ilian and $ark (A**@) inestigated the relationship between the "& stock prices and crude oil
price shocks for the period ?@H+7A**! They obsered asymmetric effect of oil price shocks on
stock market! They found that oil supply shocks hae much less impact on stock prices but oil
demand shocks depressed stock prices! 3pergis and Miller (A**@) analy-ed the effect of oil price
shocks on the stock prices using a &03R approach! They considered the monthly data of eight
deeloped economies (3ustralia, Canada,
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Cifarelli and $aladino (A*?*) used a multiariate generali-ed autoregressie conditional
heteroskedasticity inmean (#3RC6M) model to estimate the effect of oil price shifts on
echange rate! 3kram (A**@) suggested that a weaker "&% led to higher oil prices and that "&%
fluctuations accounted for olatility in oil price! Most of the empirical literature on oil and
echange rate dependency proides eidence of oil7echange rate comoement (Reboredo,
A*?A) only in time domain! It is also important to understand the relationship between oil price
and echange rate in freDuency domain as it indicates short and long term dynamics! But ery
little literature eists on oil7echange rate dependency in both time and freDuency domains!
:il prices and echange rates comoements hae implications for a central bank that aims to
achiee a desired leel of appreciationdepreciation for its currency against foreign currencies!
Comprehending the relation between oil and echange rate markets is crucial as it impacts manykey financial and economic aspects of a country! The impact of oil price shock is significant
mainly for oilimporting countries! 6ence, understanding the correlation between oil prices,
echange rates, and stock market is important!
1. N$$; &%r #+$ S#9;*
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consumption alone is not appropriate, since it ecludes ma1or oil consuming countries like China
and India! 6ence, use of proy ariables to account for the increasing consumption from
emerging economies such as China and India is pertinent to capture the global consumption
effectiely!
Contemporary research in the field of oil price dynamics indicates that financial factors also
affect oil price apart from fundamental factors! Many studies hae shown significant impact of
echange rate on crude oil prices (3mano and 0an 5orden, ?@@P Basher et al!, A*?AP Beckmann
and C-uda1, A*?+), but most of them hae used 588R (Breitenfellner et al!, A**@), R88R
(:riawote and 8riemo, A*?AP Breitenfellner et al!, A**@) and "& dollar echange rate, which is
based on the transaction between "& and its trading partners! 8amining the impact of effectie
echange rate of dollar inde has limitations in accounting for the global trading of oil in dollars!
6oweer, using a comprehensie measure such as %ollar inde (broad) would capture the
complete dynamics of oil trading! 6ence, it is pertinent to eamine the impact of dollar inde
(broad) on oil price than looking at the impact of effectie echange rate on oil prices!
$rior research hae also found significant impact of stock inde on crude oil prices (Basher et al!,
A*?AP Cifarelli and $aladino, A*?*P Breitenfellner et al!, A**@)! 9ith the adancement of
fianancialisation, forward and futures market impact oil prices! If the epected future oil spot
price is greater than the futures price, there will be a premium to etract oil from well! But, the
impact of spread between the current spot price and a year ahead futures price of oil has not been
considered by prior studies! Considering ?Amonth basis which measures the premium of
holding storing a crude oil rather than a deriatie product may proide more insight on crude
oil price discoery!
&ornette et al!, (A**@) postulated that the oil price shocks during crisis are due to speculatie
factors and speculatie trading can influence the oil prices without any change in fundamental
factors (6amilton, A**@)! &peculation ariable such as feedback trading was found to haenegatie effect on oil prices (Cifarelli and $aladino, A*?*)! 9hile, noncommercial net long
positions (futures) are found to hae positie effect oil price (
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&peculatie actiity based on noncommercial net long positions (futures and options) may
capture the impact of speculation on oil price more effectiely!
:il price series ehibit structural breaks and nonlinearity (Reboredo, A*?*) and may ehibit
dynamic behaior with respect to the financial eents such as crisis, changes in goernment
policy, changes in business cycles and economic downturns! 3s the behaior of the oil price
determinants change oer time, understating the oil price and its determinants behaior with
respectie regimes becomes crucial! "sing ordinary regression model fails to identify the
dynamic linkage between oil prices and its determinants across regimes! Most of the eisting
literatures eamine the relationship using traditional linear time series models such as 03R
08CM, cointegration and structural 03R! 6oweer, oil price is found to hae structural breaks
and may not be linear and most of the studies eamine casual long term relationship of crude oil
with only one or few ariables! 4inear models could suffer from possible misspecification or
omitted ariable bias and the relationship between oil price and determinants may ary oer
time! Incorporating or using the model, which accounts for structural break and capturing the
effect at different periods would help in accurate estimation of oil price! 0ery few studies hae
used nonlinear models such as CCC #3RC6M and Bayesian Model aeraging (Breitenfellner
et al!, A**@)! 6oweer, these models cannot estimate the relationship with respect to different
market phases and fail to address structural breaks in the data! Marko Regimeswitching model
proides a fleible framework to model structural breaks, dynamic shifts and dynamic
relationships! Markoregime switching methodology is largely used for finding nonlinear
causality (
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with the appreciating echange rate (3mano and 0an 5orden, ?@@P BenassyGuere et al!, A**HP
5arayan et al!, A**P Basher et al!, A*?AP Beckmann and C-uda1, A*?+)! But other studies argued
that increase in oil prices is associated with the depreciating echange rate (9ang and 9u,
A*?A)! 9hile bidirectional causality eists between oil price and echange rates after crisis
(%ing = 0o, A*?A), at large time hori-ons (Benhmad, A*?A) and at higher time scales (Tiwari et
al!, A*?+), Iwayemi and
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perspectie considering nominal prices! 6ence, there is a need to focus on traders and
institutional inestor2s perspectie and eamine the comoement between benchmark oil price
with (i) nominal echange rates and (ii) stock indices of ma1or oilimporting countries using
waelet coherence approach!
1.@ O)>$'#i$" %& #+$ S#9;*
The purpose of this study is to eamine the factors that determine the crude oil price and the
comoement dynamics with macroeconomic factors! It is important to understand the factors
affecting crude oil price to accurately model crude oil price behaior with respect to the changes
in the economic cycles and olatile regimes! It is also pertinent to understand the impact of crude
oil price on the economy and eplore the link between oil prices and arious macroeconomic
ariables for a large set of oilimporting countries! 6ence, the specific ob1ecties of the study
are
?! to eamine the impact of fundamental, financial, and speculatie factors on 9TI crude oil
prices at high and low olatile regimes!
A! to eamine the comoement between oil price and echange rate of oil importing
countries across different time and freDuency hori-ons!
+! to eamine the eistence of comoement between oil price and &tock Indices of oil
importing countries across different time and freDuency hori-ons!
In this study, comoement between oil price and echange rates, and oil price and &tock Indices
is perceied from perspectie of both the traders and institutional inestors! Traders and
institutional inestors hae aried inestment hori-ons, as they hae aried risk profiles!
1.6 H*:%#+$"i"
6ypothesis for the study has been formulated and tested based on the gap from the eisting
literature! The hypothesis is as follows
6?' $resence of linear relationship
24
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6A' There is no significant impact of speculatie factors on 9TI oil prices
6+' There is significant impact of speculatie factor on 9TI oil prices controlling for financial
factors
6' There is no significant impact of speculatie factors on 9TI oil prices controlling for
fundamental, financial, and supply disruption factors
6>' The effect of 9TI crude oil prices on echange rate of oil importing countries is not
statistically significant
6' The effect of 9TI crude oil prices on &tock Inde of oil importing countries is not
statistically significant
Fi89r$ 1.1 Fr!$**
?A month B3&I& (
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1. D!#! !n; S!:7$
The sample used for the study comprises of monthly 9TI crude oil spot price traded at 5ew
Eork Mercantile 8change (5EM8F)! The 9TI crude oil data is collected from 8nergy
Information 3gency! The ariables effecting crude oil price are grouped into four broad
categories, namely' (i) demand factors, (ii) supply factors, (iii) financial factors, and (i)
speculatie factors! The demand factors include and for the ariables such as :8C%
consumption, :8C% imports, China Industrial $roduction, and India Industrial $roduction! The
supply factors include Total oil Rigs, :$8C production, and :8C% inentory! **, Basis 7 :il ( 7 *>A*? 8nergy Information 3dministration
26
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Imports (:8C%) *?@@> 7 *>A*? 8nergy Information 3dministration
C6I53 Industrial Production (US$) *?@@> 7 *>A*? 9orld bank
I5%I3 Industrial Production (US$) *?@@> 7 *>A*? 9orld bank
S9::7* V!ri!)7$"
:$8C $roduction *?@@> 7 *>A*? 8nergy Information 3dministration
:8C% Inentory *?@@> 7 *>A*? 8nergy Information 3dministration
Financialization - Variables
%ollar Inde *?@@> 7 *>A*? &t! 4ouis A*? 8nergy Information 3dministration
Speculation - Variables
5et 4ong $ositions (5onCommercial) 7 :il( 7 *>A*? Commodity
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T!)7$ 1. E'+!n8$ r!#$ D!#!
E'+!n8$ C%9n#r* C9rr$n'* N!$
"&%C5E China Chinese Euan
"&%8"R 8uro Region 8uro
"&%I%R Indonesia Indonesian Rupiah
"&%I5R India Indian Rupee
"&%/$E /apan /apanese Een
"&%.R9 &outh .orea &outh .orean 9on
"&%% &ingapore &ingapore dollar
"&%TRE Turkey Turkish 4ira
"&%T9% Taiwan 5ew Taiwan %ollar
Relationship between oil price and echange rate is etensiely studied (3mano and 0an
5orden, ?@@P Chen and Chen, A**HP Basher et al!, A*?AP Beckmann and C-uda1, A*?+)!
C+in$"$ Y9!n (CNY is the currency for china! Chinese Euan is pegged with "& %ollar! It
follows a fied echange rate system! 6uang and #uo (A**H) studied the impact of oil price
shock on the trend moements of ChinaLs real echange rate!
E9r% (EUR is the currency for the following countries 7 3ustria, Belgium4uembourg,
Cyprus,
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In;i!n R9:$$ (INRis the official currency of India! Indian currency is a managed float! RBI
trades freDuently on "&%I5R, thus it is a de facto controlled echange rate! :ther rates (such as
the 8"RI5R and I5R/$E) hae the olatility typical of floating echange rates! #hosh (A*??)
studied relationship between the crude oil price and "&%I5R for the period starting from And
/uly A**H to Ath %ecember A**!
4!:!n$"$ Y$n (4PYis the currency for /apan! The country adopted a floating or fluctuating
echange rate system! 5aka1ima and 6amori (A*?A) studied the casualty between crude oil and
/$E"&% echange rate! The data period considered for the study spans from ?st &eptember
A**> to A@th /uly A*??!
S%9#+ /%r$!n %n (/R is the currency of &outh .orea! They hae allowed freefloat
echange rate from ?@@H! Masih et al! (A*??) studied the implications of oil price fluctuations
and oil price olatility on echange rate of &outh .orea!
Sin8!:%r$ D%77!r" (SGDis the currency of &ingapore! It follows a managed float echange rate
system!
T9r=i"+ Lir! (TRYis the official currency of Turkey and the Turkish Republic of 5orthern
Cyprus! It follows freefloat echange rate system! &oytas (A*??) eamined the longrun and
shortrun transmissions of information between the world oil price, Turkish interest rate, Turkish
lira7"& dollar echange rate, and domestic spot gold and siler price!
N$< T!i
They adopted freefloat echange rate system since ?@@! RafiD et al! (A**@) empirically
eamined the impact of oil price olatility on key macroeconomic indicators of Thailand!
The sample stock indices that were considered for the study are as follows! 5ikkei AA> inde
(/apan 5.E), 5I* (India 5I inde (Indonesia 4G>), .orea Composite &tock
$rice Inde (&outh .orea .:&$I), IB8F +> (&pain IB8F),
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includes from th /anuary A*** to +*th %ecember A*? for all the indices ecept for &&8 >*!
&le period for &tock inde of china (&&8>*) starts from >th /anuary A** to +*th %ecember
A*?! The echange rate and stock inde data is collected from the Bloomberg database! Table
?!> summari-es the stock inde data!
T!)7$ 1.@ S#%'= In;$ ;!#!
In;$ C%9n#r* In;$ n!$
5.E /apan 5ikkei AA>
5I Indonesia 4G >
.:&$I .orea .orea Composite &tock $rice Inde
IB8F &pain IB8F +>
and the base alue was set at ?***! It is a freefloat market capitali-ationweighted inde!
30
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S#!n;!r; P%%r" @00 is an 3merican &tock Market inde! It comprises of >** large
companies (based on their market capitali-ation), that are listed on either 5ew Eork &tock
echange (5E&8) or 5ational 3ssociation of &ecurities %ealers 3utomated Guotations
(53&%3G)! It is a freefloat capitali-ationweighted inde! The inde was in eistence from
?@>H! The components of the &=$ >** are selected based on eight parameters! They are market
capitali-ation, liDuidity, domicile, public float, sector classification, financial iability, length of
time publicly traded, and listing echange!
L @ in;$ is Indonesian inde! It was launched in most
liDuid companies listed on the Indonesia &tock 8change! It is a market capitali-ationweighted
inde! ?+ /uly ?@@ was used as the base day, with an inde base alue of ?**! It consists of
ma1or sectors such as agriculture, finance, mining, infrastructure, etc! It captures H* of thedomestic market capitali-ation!
Ni==$i 22@ in;$is a stock market inde for /apan! It comprises of AA> top companies that are
traded on the Tokyo &tock 8change (T&8)! The components of the inde are reiewed once a
year! It is a priceweighted inde! The 5ikkei AA> &tarted on H &eptember ?@>*!
/%r$! C%:%"i#$ S#%'= Pri'$ 200 In;$ (/OSPI 200 is the inde of &outh .orea! It
comprises of A** large publiclytraded companies on the .orean &tock 8change! This is marketcapitali-ationbased weighted inde! .:&$I was introduced in ?@@*! The base alue of the inde
was ?**! It has oer H* market alue of the composite stock price inde which includes all the
stocks that are traded on the .orean &tock 8change, and so moes along with the .:&$I inde!
IBE3 @is the benchmark stock market inde of &pain! The inde comprises of +> most liDuid
&panish stocks that are traded on Madrid &tock 8change #eneral Inde! It was initiated in ?@@A!
It is a market capitali-ationweighted inde! The inde is reiewed twice annually!
FTSE MIB 0 is the primary bench mark stock market inde of Italy! The inde consists of the
* top liDuid stocks that are traded on the Borsa Italiana, the Italian national stock echange! It
represents the large cap component of the
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S#r!i#" Ti$" In;$ (STIis the benchmark inde for the &ingapore stock market! It is market
capitali-ationweighted stock market inde! It constitutes the top +* liDuid companies that are
listed and traded on the &ingapore echange! It is 1ointly calculated by &ingapore $ress 6oldings
(&$6), &ingapore 8change (F), and
of the total market capitali-ation
D$9#"'+$r A=#i$nin;$ (DA3 0 is the benchmark inde of #ermany! It consists of +* ma1or
#erman companies trading on the
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S#%'= !r=$# In;$ (SP @00is the proy for the growth of the economy and is an alternate
inestment ehicle (Cifarelli and $aladino, A*?*P Breitenfellner et al!, A**@)
Tr!;$-
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WTI oil=Intercept+1NC NET LONG POS+
2SP500+
3Dollar Index+
412M Basis+
9TI crude oil price is used as dependent ariable! 5C 58T 4:5# $:& represents non
commercial trader2s net long position, &=$>** represents the &=$ >** inde, %ollar inde
represents the Tradeweighted "& dollar inde (Broad) and ?AM Basis represents the ?Amonth
basis between 9TI crude oil
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D$#$rin!n#" %& %i7 :ri'$ A M!r=%-r$8i$ "
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(iii) The impact of fundamental, financial and speculation factors on 9TI oil price at high
and low olatility regimes!
:il price series ehibit structural breaks and nonlinearity (Reboredo, A*?*) and may ehibit
dynamic behaior with respect to the financial eents such as crisis, changes in goernment
policy, changes in the business cycles and economic down turns! 3s the behaior of the oil price
determinants2 changes oer time, understating the oil price and its determinants2 behaior with
respectie regimes becomes crucial! "sing ordinary regression models fail to identify the
dynamic linkage between oil prices and its determinants across regimes! Marko Regime
switching model proides a fleible framework to model structural breaks, dynamic shifts and
dynamic relationships! 6ence, Marko Regimeswitching model was used to eamine the
determinants of 9TI oil prices at high and low olatile regimes!
8mpirical results of our study indicate that speculatie factor plays an important role only in high
olatile state! 9hereas in low olatile state fundamental, and financial factors a ma1or role in
determining the oil price! The study proides a holistic iew about price formation in the crude
oil market by incorporating determinants from fundamental, financial and speculatie factors!
The study has implications for policymakers, financial institutions and inestors, as we indicate
the determinants that affect the crude oil price for each regime separately!
The remainder of this chapter is organi-ed as follows' &ection A!? describes a brief literature on
determinants of crude oil, elaborates research gap and motiation! &ection A!+ discusses the
framework of the study! &ection A! presents the data! &ection A!> eplains the Methodology!
&ection A! discusses the empirical results and &ection A!H concludes the chapter!
2.2 Li#$r!#9r$ %n &!'#%r" in&79$n'in8 Cr9;$ Oi7
The price fluctuations in the crude oil market are either due to changes in fundamental factors or
financial factors or due to speculation actiities! $reious literature analy-ed the crude oil priceto determine the factors affecting the crude oil price (Ee et al!, A**AP Breitenfellner et al!, A**@P
Isabel 0ansteenkiste, A*??)! But, the literature is inconclusie in demonstrating what dries the
crude oil prices!
38
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Ee et al! (A**A) forecasted the 9TI crude oil spot price considering :8C% petroleum inentory
leels as independent ariable! They hae used monthly data of the oil price and petroleum
inentory oer the period starting from /anuary ?@@A to **, 588R, R88R, 4agged oil price, and ariables pertaining to
:$8C structure! Bayesian model aeraging techniDue is used for their study! The data period
considered spans from ?@> to A**! 6e found that in ?@@*s and in A***s, fundamental factors
played a significant role in driing the oil prices!
4in and Tamakis (A*?*) applied eent study methodology to study the effect of :$8C
announcements on the 9orld :il prices! The study used daily data of different crude oil
benchmarks such as 3laska 5orth &lope, Brent blend, Bonny 4ight, %ubai
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:$8C announcements hae significant effect on the oil prices! But the magnitude of the effect is
based on the preious price regime! They also found that Guota cuts lead to positie price
returns! Guota increases lead to negatie price returns in weak and normal price regimes! 5o
change in Guota leads to insignificant or negatie price returns!
Cifarelli and $aladino (A*?*) inestigated the effect of speculation on oil price fluctuations! They
hae considered the weekly prices of the 9TI :il &pot,
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between the oil and echange rate! 5o Cointegrating relationship is obsered among these
factors! The :il and echange rate had Inerse relationshipP rise in the oil price depreciates the
%ollar echange rate against Taiwan currency!
Basher et al!, (A*?A) studied the dynamic relationship between the oil price, echange rate, and
emerging market stock prices during the period /anuary ?@ to %ecember A**! They hae
considered supply, demand and financial ariables for the study! They hae estimated the
relationship using &tructural 03R! 5o Cointegration has been found among the ariables! They
also obsered that the rise in the oil price tend to depress emerging market stock prices! They
noted that positie oil price shock lead to an immediate drop in the tradeweighted echange rate
and depreciation of currencies of oil importers in the long run!
Miller and Ratti (A**@) analy-ed the longrun relationship between the world price of crude oil
and stock markets oer the period starting from /anuary ?@H? to March A**! 0ariables used in
the study are stock indices, interest rates, Industrial production, and 9orld crude oil price! 0ector
8rror correction model is used to study the relationship! Their empirical results confirmed the
eistence of longrun relationship among the ariables and structural Breaks They also found that
the increase in oil price has negatie effect on stock Indices!
Cheillon and Rifflart (A**@) analy-ed the real rice of crude oil focusing on physical market!
Their data spans from ?st Duarter ?@@ to th Duarter A**>! 03R methodology is applied to
analy-e the real oil price using supply and demand ariables! They found that the epected
demand coerage ratio, 5on:8C% &tocks has negatie effect on oil price! 9hereas, :8C% oil
demand, 5on:8C% oil demand has positie effect on oil price! It is also found that Inasion of
.uwait has positie effect whereas the Inasion of IraD has negatie effect on oil price! They
also found that Cointegrating ectors of :$8C Duotas and price and target has negatie effect
oil price whereas the Cointegrating ectors of :8C% stocks and demand has positie effect on
the oil price
.aufmann and "llman (A**@) eamined the causal relationships between prices of the crude oil
in arious markets! The sample data of their study consists of spot oil data starts fromAnd
/anuary ?@ for 9TI and %ubai
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9TI, +rd 3pril A** %ubai
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$rior research hae also found significant impact of stock inde on crude oil prices (Basher et
al.,A*?AP Cifarelli and $aladino, A*?*P Breitenfellner et al., A**@)! 9ith the adancement of
financiali-ation, forward and futures market impact oil prices! If the epected future oil spot
price is greater than the futures price, there will be a premium to etract oil from well! But, the
impact of spread between the current spot price and a year ahead futures price of oil has not been
considered by prior studies! Considering ?Amonth basis which measures the premium of
holding storing a crude oil rather than a deriatie product may proide more insight on crude
oil price discoery!
&ornette et al!, (A**@) postulated that the oil price shocks during crisis are due to speculatie
factors and speculatie trading can influence the oil prices without any change in fundamental
factors (6amilton, A**)! &peculation ariable such as feedback trading was found to hae
negatie effect on oil prices (Cifarelli and $aladino, A*?*)! 9hile, noncommercial net long
positions (futures) are found to hae positie effect oil price (
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To ascertain the effect of fundamental factors, we hae used the ariables such as :$8C
production, :8C% stocks, :8C% 5et Imports! The ma1or demand for oil comes from emerging
economies and :C8% countries! To estimate the demand from :8C% countries we consider
:8C% consumption! &ince the consumption data for the emerging economies is noneisting,
Industrial production of China (in ;) and industrial production of India (in ;) is considered as
proy for the demand from emerging countries! 6oweer, ariables such as industrial production
of China (in ;) and industrial production of India (in ;) were not used in the literature! 9e find
the relatie effect of the ariables across periods of low and high olatility!
8isting literature used financial ariables such as &=$ >** (Cifarelli and $aladino, A*?*), Real
emerging eDuity prices (Basher et al!, A*?A), %ollar Inde (Basher et al!, A*?A), 588R, R88R
(Breitenfellner et al!, A**@), 4agged oil price (Breitenfellner et al!, A**@), :$8C implicit price
target (Cheillon and Rifflart, A**@)! In our study, we hae included financial ariables such as
&=$ >**, %ollar Inde and a ?Amonth basis! In order to capture the speculatie effect we hae
included noncommercial net long position (both futures and options), as eisting net long
position influences the price moements of the security!
Most of the eisting literature eamined this relationship ma1orly using traditional linear time
series models such as 03R 08CM, cointegration and structural 03R! :il price is also found to
hae Breaks and longrun relationship in the ariables (Miller and Ratti, A**@)! 6ence these
linear models suffer from possible misspecification or omitted ariable bias! Moreoer, the
relationship between oil price and other determinants may ary oer time! Incorporating or using
the model, which accounts for structural break and the effect could change at different periods
would help in accurate estimation of oil price!
0ery few studies hae used nonlinear models such as CCC #3RC6M and Bayesian Model
aeraging! 6oweer, these models cannot estimate the relationship with respect to different
market phasesP also, they fail to address breaks! Markoregime switching methodology islargely used for finding nonlinear causality (
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T!)7$ 2.1 S9!r* %& 7i#$r!#9r$ %n ;$#$rin!n#" %& #+$ 'r9;$ %i7
3uthors &le :b1ectie %eterminants Model Results
.ilian and4ee (A*?)
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Basher et al!,(A*?A)
/anuary?@7%ecemberA**
Relationship between oilprice, echange rate, andemerging market stockprices
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Cheillonand Rifflart(A**@)
?G ?@@7GA**>
3naly-e the real rice ofcrude oil with focus onphysical market
! Inasion of IraD (V! Cointegrating ec
of :$8C Duotas anprice and target (V)
H! Cointegrating ecof :8C% stocks andemand(U)
.aufmannand "llman(A**@)
&pot andfutures data
8amine causalrelationships betweenprices of crude oil inarious market
5ear month and far mothfutures for 9TI, Brent,%ubai, spot price of 9TI,Brent, Bonny, Maya and%ubai
Modified Test for CoIntegration(#rangerand 4ee, ?@@)
Cointegration eists betwall the crude oil benchmar
.ilian (A**@)/anuary ?@H+to %ecemberA**H
Identify %emand andsupply shocks foreplaining fluctuationin the real oil price
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capacity, oil reseres, oilsupply, oil stocks, capacityutili-ation, eplorationcost, Baltic dry inde,dummy (hurricane, war),:$8C reseres, :$8CDuota, &audi Duota and oilsupply (:$8C share)
:ther factors'588R, R88R,&=$, 5etpositions, and 4agged oilprice!
3kram(A**@)
/anuary ?@@*7 3pril A**H
8amine therelationship amongcommodity prices,interest rates and thedollar
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The hypothesis of our study is as follows'
a! 5ull hypothesis for the presence linear relationship
H0a: Presence o linear relations!i"
b! 5ull hypothesis for the impact of speculatie factors on the 9TI oil prices
H0b: T!e coeicient o t!e s"eculati#e #ariable is ero
c! 5ull hypothesis for the impact of speculatie factor on the 9TI oil prices controlling for
financial factors
H0c: T!e coeicient o t!e s"eculati#e #ariable is ero controllin% or inancial actors
d! 5ull hypothesis for the impact of speculatie factors on the 9TI oil prices controlling for
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The data is collected from databases such as 8nergy Information 3gency, 9orld Bank, &t! 4ouis
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Cheillon and Rifflart, A**@P Ee et al!, A**A)! 6igh Inentory is epected to hae negatie effect
on the oil prices in the short run (V)!
OECD C%n"9:#i%n !n; I:%r#", measure the actual demand from deeloped economies and
from emerging economies! In;9"#ri!7 :r%;9'#i%n %& C+in! !n; In;9"#ri!7 :r%;9'#i%n %&
In;i!are included in the study, as they are the two ma1or oil consuming and importing countries
outside the :8C% region! The demand factors are epected to hae a positie effect onthe oil
price (U)!
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negatie net long positions is epected to decrease the oil price (V)!Table A!A summari-es the
ariables that are used, sample period considered for each ariable and source it is taken from!
T!)7$ 2.2 D!#! D$"'ri:#i%n
DETERMINANTS SAMPLE PERIOD SOURCE
Oi7 B$n'+!r=
4agged 9TI &$:T (5EM8F) *?@@> 7 *>A*? 8nergy Information 3dministration
Fundamental Variables
D$!n; V!ri!)7$"
Consumption (:8C%) *?@@> 7 *>A*? 8nergy Information 3dministration
Imports (:8C%) *?@@> 7 *>A*? 8nergy Information 3dministration
C6I53 Industrial Production (US$) *?@@> 7 *>A*? 9orld bank
I5%I3 Industrial Production (US$) *?@@> 7 *>A*? 9orld bank
S9::7* V!ri!)7$"
:$8C $roduction *?@@> 7 *>A*? 8nergy Information 3dministration
:8C% Inentory &tock *?@@> 7 *>A*? 8nergy Information 3dministration
Financialization variables
%ollar Inde (Broad) *?@@> 7 *>A*? &t! 4ouis A*? 8nergy Information 3dministration
Speculation variables
5et 4ong $ositions (5onCommercial) 7 :il( 7 *>A*? Commodity
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Fi8. 2.1 I:!'# %& S:$'97!#i%n %n TI Cr9;$ %i7 :ri'$ 7%< !n; +i8+ !ri!n'$ "#!#$"
Fi8. 2.2 I:!'# %& S:$'97!#i%n %n TI Cr9;$ %i7 :ri'$ "$ri$" '%n#r%77in8 &%r &in!n'i!7
!ri!)7$" 7%< !n; +i8+ !ri!n'$ "#!#$"
56
9TI Crude oil price
(&pot 7 5EM8F)
SPECULATION
5onCommercial net 4ong positions (
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Fi8. 2. I:!'# %& &9n;!$n#!7", &in!n'i!7 !n; ":$'97!#i$ &!'#%r" %n TI 'r9;$ %i7 :ri'$
7%< !n; +i8+ !ri!n'$ "#!#$"
57
F9n;!$n#!7
Oi7 B$n'+!r=
9TI &pot price (5EM8F)
DEMAND
:8C% Imports
:8C% Consumption
Industrial production India
Industrial production 7 China
SUPPLY
:$8C $roduction
:8C% &tocks
9TI Crude oil price(&pot 7 5EM8F)
SPECULATON
5onCommercial net 4ong positions
(
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&eeral studies in the literature hae used Markoregime switching models to inestigate
nonlinearity and asymmetry (6amilton, ?@@P #ray, ?@@P .rol-ig, ?@@P .rol-ig, A***P 3rtis et
al!, A**)! 6amilton (?@@) proposed that Regime shifts in mean and ariance in a time series
ariable ty
can be modeled using Markoregime switching autoregressie model (M&3R) of
"thorder as follows
?
?
[( ) U ( [( )) ( ) !"
t t i t t i t t
i
y s y s s =
= +
(A!A)
9here \iis the slope coefficient of the autoregressie term (y t V ?)! [ and ] are the mean and
standard deiation based on the state at time t(st! ytrepresents the 9TI crude oil spot price, this
M&3R methodology allows us to model the potential regime shifts in the crude oil spot price!
.rol-ig (?@@) deeloped M&03R, which is a generali-ation of the M&3R model (6amilton,
?@@) and used to find the causal relationship between endogenous ariables! &eeral eisting
literature used M&03R for this purpose (.rol-ig, ?@@HP 9arne, A***P 8hrmann et al!, A**+P
$saradakis et al!, A**>)! In these models, the intercept term, autoregressie slope coefficient and
the error ariance are regime dependent! The M&03R is modeled as follows'
? ?
? A + ,
? ?
( ) ( ) ( ) ,t ) t t * ) t t * t r t * *
r s r s + # s u = =
= + + + (A!+)
? ?
B > ,
? ?
( ) ( ) ( ) !t ) t t * ) t t * t + t * *
+ s + s r # s u = =
= + + + (A!)
4et2s assume rtand+tare two endogenous ariables! utis the innoation process, with ariance
#(st) based on the statestat time t, follows an irreducible twostate Marko process defined by
the transition probabilities (Pi) between states as follows'
( ?)Y Z,i) t t P " s ) s i= = = 9ith
A
?
?i))
P=
=for all i, ^?, A_,
9here,
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-3
-2
-1
0
1
2
3
4
5
-3
-2
-1
0
1
2
3
4
5
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OILSPOTPRICE
NON COMMERCIALNE TLONGPOSITION
-2
-1
0
1
2
3
-2
-1
0
1
2
3
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OILSPOTPRICE
TRADE WEIGHTED DOLLAR INDEX
-3
-2
-1
0
1
2
3
-2
-1
0
1
2
3
4
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OILSPOTPRICE
S & P 500
-5
-4
-3
-2
-1
0
1
2
3
-3
-2
-1
0
1
2
3
4
5
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI ASIS
-4
-3
-2
-1
0
1
2
3
4
-3
-2
-1
0
1
2
3
4
5
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OILSPOTPRICE
OECD IMPORTS
0
20
40
60
80
100
120
140
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OIL SPOT PRICE
-4
-3
-2
-1
0
1
2
3
4
-3
-2
-1
0
1
2
3
4
5
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OILSPOTPRICE
OECD CONSUMPTION
-4
-3
-2
-1
0
1
2
3
-3
-2
-1
0
1
2
3
4
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OILSPOTPRICES
OECD IN!ENTOR"
-2#0
-1#5
-1#0
-0#5
0#0
0#5
1#0
1#5
2#0
-3
-2
-1
0
1
2
3
4
5
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OILSPOTPRICE
OPEC PRODUCTION
-4
-3
-2
-1
0
1
2
3
-3
-2
-1
0
1
2
3
4
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OILSPOTPRICE
TOTALOIL RIGCOUNT
-1#2
-0#8
-0#4
0#0
0#4
0#8
1#2
1#6
2#0
2#4
2#8
-4
-3
-2
-1
0
1
2
3
4
5
6
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTICRUDE OILSPOTPRICE
INDUSTRIALPRODUCTION IN INDIA
-1#5
-1#0
-0#5
0#0
0#5
1#0
1#5
2#0
-3
-2
-1
0
1
2
3
4
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
WTI CRUDE OILSPOTPRICE
INDUSTRIALPRODUCTION IN CHINA
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T!)7$ 2. D$"'ri:#i$ "#!#i"#i'" %& &9n;!$n#!7, &in!n'i!7 !n; ":$'97!#i$ !ri!)7$"
D$#$rin!n#" M$!n S#;. D$. S=$? >!>H*+> ??!>+A ??!+*@+ *!*+?+>
:$8C $R:%"CTI:5 *!**?A+ *!*?>>*> *!>A?? >!@@A?> @!*+A@+ ?>!+@+ ?>!@H *!*?>
:8C% I5085T:RE *!**** *!**@H *!>*?H !>H ++!A++> +!>>A? ?! *!*?>>
:8C% C:5&"M$TI:5 *!***?A *!*A+ *!A?+A A!@@+A ?!H>>>@ A!@?*@ +A!>+AA@ *!A>A*+
:8C% 58T IM$:RT& *!***>? *!*+@ *!*A@>* A!>+ A!*A*+H ?H!HH +*!?*@ *!>
I5%"&TRI34
$R:%"CTI:5 I5%I3 *!**@>A *!*>@+ *!H*A? !@+*H *!?A -2.012 A!@ *!A+>?H
I5%"&TRI34
$R:%"CTI:5 C6I53 *!**A@ *!*>+? *!*A>> +!H>@*+ ??!>>A +!*?+@?> !?HH *!?+HH?
&=$ >** *!**>H *!*>*+ *!HH>?> !>+*?@H >?!H+? ?+!>A ?+!H+*AA *!?H?
%:443R I5%8F *!***+> *!*?AA *!+**@ !**++ +!?+? ?*!+*A> ?*!>*@ *!+*H?A
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?A M B3&I& *!*?*>@A *!@@?> *!*@H H!@@H ?!@>>+ ?!*H A*!>A *!??*?@
5C 58T 4:5# $:&ITI:5 *!**@AA *!>*@H *!@ ?*!*@H >>@!@@ ?!AA++ ?!?>+ *!??+H
5otes' ?* significance, > significance, ? significance
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2.6.1 H*:%#+$"i" 1 T$"# &%r N%n-7in$!ri#*
The nonlinearity in the returns series is tested using B%& test! The results of the B%& test are
presented in the Table A!! The test statistics are presented in the same table! The test statistics
are significantly greater than the critical alues! Thus, the null hypothesis of I!%!% is re1ected!
The residuals of linear :4& model are also tested for nonlinearity and found that the residual
series is nonlinearly dependent on the oil prices!
T!)7$ 2. BDS T$"# R$"97#"
%imension B%& &tatistic $rob!
A *!*?@@@ *!**+
+ *!*A?H?? *!**@
*!*A> *!**@
> *!*A>?>? *!*??
*!*AA?H *!*A?
5ote' This table reports the results of B%& test!
%enotes the re1ections of the null hypothesis at ?* significance leelP %enotes the re1ections of the null
hypothesis at > significance leelP %enotes the re1ections of the null hypothesis at ? significance leel!
The study considered two states in the Markoregime switching model! These two states
represent the high and lowolatility regimes in the model! Chen and Chen (A**H) used two
state Markoregime switching model to differentiate bull and bear markets! 4i (A**H) used two
state MarkoRegime &witching Model to distinguish low and high uncertainty in stock markets!
In our model the two regimes are classified as high and lowolatile regimes! The regimes are
classified based on their model ariance! 6igher the model ariance the state termed as high
olatility state and lower the model ariance the state termed to be low olatility state!
2.6.2 H*:%#+$"i" 2 E&&$'# %& S:$'97!#i%n %n #+$ Oi7 Pri'$ M$!"9rin8 #+$ M!r8in!7 E&&$'#
%& S:$'97!#i%n
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The impact of speculatie factors on the 9TI oil price is estimated using Markoregime
switching regression model! &tate ? is lowolatile regime and state A is higholatile regime!
The results are presented in Table A!>! It is obsered from the results that in lowolatile regime
the impact of noncommercial trader2s n$# 7%n8 :%"i#i%non the 9TI oil price is insignificant,
whereas in higholatile regime it is significant at ?*! This indicates that speculatie factor has
a negligible effect on the oil price! The difference in the model ariance between the two states is
minimal which indicates that the ariations in the crude oil price eplained by speculatie factor
in both the states is nearly the same and hae minimal significance!
The duration of the regime ? is ?H>!H and regime A is >!A! This shows that olatility of crude oil
conditioned on speculatie factor remained in the lowolatile regime for most of the times! The
leel of speculation captures by noncommercial trader2s net long position is consistentirrespectie of the regime!
T!)7$ 2.@ E"#i!#i%n r$"97#" %& M!r=%-R$8i$ S significance, ? significance
Fi8 2.@ C%n;i#i%n!7 $!n", V%7!#i7i#i$" !n; S%%#+$; #r!n"i#i%n :r%)!)i7i#i$" &%r %;$7 1
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0 50 100 150 200 250-0.4
-0.2
0
0.2
0.4
Explained Variable #1
0 50 100 150 200 2500.0725
0.073
0.0735
0.074
0.0745
Conditional Std of Equation #1
0 50 100 150 200 2500
0.5
1
1.5
TimeSm
oothed
States
Probabilities
State 1
State 2
It is obsered from the
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B!"i"has insignificant impact on the 9TI oil price in both higholatile regime and lowolatile
regime! This indicates that basis hae no significant role in the determination of oil price during
all times market phases (5ormal, Bearish, and Bullish)!
The impact of SP @00on 9TI oil price is insignificant in lowolatile regime, whereas in high
olatile regime it is significant at ?! This indicates that stock market inde eplains crude oil
price only in the times of normal market phases! But, during bullish and bearish market periods
stock market inde fails to eplain the dynamics in the oil price! It is epected to hae an inerse
relationship with oil price, but a positie relationship is obsered between stock market inde
and oil price! Rise in the price of oil might be due to the increased consumption of the crude oil
during economic epansion!
The duration of the regime ? is ?!A and regime A is >!*A! This shows that olatility of the crude
oil conditioned on combined speculatie and financial factor is high, that is oil price is more
fluctuating! The leel of speculation is significant irrespectie of the regime when controlled for
financial factors! The difference in the model ariance between the two states indicates that the
ariations in the crude oil price is better eplained by speculatie and financial factor in high
olatile states compared to the lowolatile state!
T!)7$ 2.6 E"#i!#i%n r$"97#" %& M!r=%-R$8i$ S
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Model ariance *!**A+++ *!**@?
8pected duration of Regime ?!A >!*A Time periods
Transition $robabilities Matri (std! error, palue) * *!?A+>
? *!H>
5otes' denotes ?* significance, denotes > significance, denotes ? significance
Fi8 2.6 C%n;i#i%n!7 $!n", V%7!#i7i#i$" !n; S%%#+$; #r!n"i#i%n :r%)!)i7i#i$" &%r %;$7 2
0 50 100 150 200 250-0.4
-0.2
0
0.2
0.4
Explained Variable #1
0 50 100 150 200 2500.04
0.05
0.06
0.07
0.08
Conditional Std of Equation #1
0 50 100 150 200 2500
0.5
1
TimeSmoothedStatesProbabilities
State 1
State 2
It is obsered from the that there is a freDuent switchoer between the two states! The
regression results indicates that speculation combined with financial factors eplains the changes
in the 9TI oil price
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OPEC :r%;9'#i%nhas significant positie relationship in both high and lowolatile regimes! It
implies that the :$8C production is lower than the eDuilibrium leel! :ur result suggests that
:$8C production is one of factor in determining the oil price in all market phases! The impact
OECD "#%'=on oil price in both high and lowolatile regimes is significant at ?! In low
olatile period the relationship is negatie, whereas in higholatile period it is positie!
OECD '%n"9:#i%nhas insignificant impact on the 9TI oil price in lowolatile regime,
whereas in higholatile regime it is significant at ?! This indicates that :8C% consumption
has significant role in the oil price determination only during bearish and bullish market phases!
Its impact is insignificant during normal market phase!
The impact of OECD n$# i:%r#"on 9TI oil price in lowolatile regime is insignificant,
whereas in higholatile regime it is significant at ?! The relationship between the crude oil and
:8C% import is negatie! :8C% consumption plays a significant role in determination of oil
price only during bearish and bullish market phases!
The relationship between the crude oil and In;9"#ri!7 :r%;9'#i%n %& In;i!is negatie and is
significant at ? in higholatile regime! In lowolatile regime, it is positie and is significant
at ?! This implies that Industrial production of India plays a key role in estimating the 9TI
crude oil price!
The impact of In;9"#ri!7 :r%;9'#i%n %& '+in!is insignificant in lowolatile regime, whereas it
is negatie and is significant at ? in higholatile regime! This implies that Industrial
production of China plays a significant role in determination of the oil price only during bearish
and bullish market phases!
The duration of the state ? is ?! and state A is ?!?! This indicates that the olatility of crude
oil is moderately eplained by combined speculatie, fundamental, and financial factors! The
leel of speculation is significant in higholatile regime indicating that speculatie factor hassignificance in determining the oil price only in higholatile phase when combined with other
factors!
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The difference in the model ariance between the two states indicates that the ariations in the
crude oil price is better eplained by speculatie, fundamental, and financial factors in low
olatile states compared to the higholatile state!
T!)7$ 2. E"#i!#i%n r$"97#" %& M!r=%-R$8i$ S
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Model ariance *!***@ *!*****>
8pected duration of Regime ?! ?!? Time periods
Transition $robabilities Matri (std! error, palue) *!@ *!A
*!* *!+
5otes' ?* significance, > significance, ? significance
It is obsered from the graphs that the transition between the states is less compared to the
preious case!
Fi8 2.C%n;i#i%n!7 $!n", V%7!#i7i#i$" !n; S%%#+$; #r!n"i#i%n :r%)!)i7i#i$" &%r %;$7
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0 50 100 150 200 250-0.5
0
0.5
Explained Variable #1
0 50 100 150 200 2500
0.05
0.1
Conditional Std of Equation #1
0 50 100 150 200 2500
1
2
TimeSm
oothed
States
Probabilities
State 1
State 2
2. S9!r*
This paper has analy-ed the impact of fundamental, financial and speculatie factors on the 9TI
crude oil prices in high and low olatility periods using regimeswitching methodology!
8mpirical results of 6ypothesis A suggest that speculation has a minimal effect on 9TI oil price!
6ence, speculatie factors alone cannot eplain oil price changes! Minimal difference in ariance
in states suggested that speculation does not change hugely across states! The estimates from
6ypothesis + indicated that speculatie factors (5oncommercial traders net long position) when
controlled for financial factors significantly eplain the 9TI oil price in both the regimes! This
implies that speculation has greater eplaining power when incorporated with other factors!
It is also obsered from the results (6ypothesis ) that the speculatie ariable, when controlled
for fundamental and financial factors hae a significant role in eplaining the 9TI oil price in
high olatility state! 3t low olatility regimes, fundamental, and financial hae significant role in
price discoery of oil price! 9hile at the high olatility regimes, we obsere that factors
pertaining to speculation combined with financial and fundamental factors hae a significant
effect on the oil price!
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The results are of greater significance for the policy makers and regulators! The three important
findings from the study are' (i) &peculation has minimal eplanatory powerP (ii) &peculation
affects oil price positiely during lowolatile state and negatiely during higholatile state
when controlled for financial ariablesP and (iii) &peculation has significant impact on oil price
only in high olatility regime!
The results suggest that the effect of speculation on oil price can only be seen in higholatile
regimes! 9hereas, during lowolatile regimes, supply and financial factors plays a significant
role in eplaining oil price! 6ence, it reDuired for the regulators and policy makers to look into
supply dynamics, financial factors as well as speculatie factors of the oil prices based on the
current in order to track or predict the moements of the oil price!
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The research Duestions that are addressed in this chapter are as follows'
?! %oes comoement eists between the oil price and 8change rates of the oilimporting countries
o 9hat is the strength of the comoement between the oil price and
8change rates
o 6ow it eoles across freDuency and oer time
A! %oes comoement eists between the oil price and &tock Indices of the oil
importing countries
o 9hat is the strength of the comoement between the oil price and &tock
indices
o 6ow it eoles across freDuency and oer time
This study focuses on the ma1or oilimporting countries, thus proiding holistic picture about
how the oilimporting countries and their aried importing leelsDuantity impacts arious
macroeconomic indicators! 3s oil being the one of the primary source of energy in these
countries, the price of oil has a ma1or influence on the economy and that has arious effects on
different macroeconomic ariables! Traders and institutional inestors hae aried inestment
hori-ons, so both hae different risk profiles! 6ence, in the current study, the relationshipco
moement between (i) the oil price and 8change rates and (ii) the oil price and &tock Indices is
inestigated from traders and institutional inestor2s perspectie!
"sing waelets, we can capture both shortrun and longrun moements in time and freDuency
space! The study of the comoement between (i) the oil price and 8change rates and (ii) oil
price and &tock Indices returns is crucial for risk assessment in financial industry! By using
waelets, we study the lifecycle of comoements between ariables, which is essential for risk
assessment to traders and institutional inestor2s! preious &tudies hae used waelet to measure
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the comoements across different ariables (Reboredo and Castro,A*?+a, bP #raham et al!,
A*?+P Tiwari et al!, A*?+a, b)!Traditional time series models only look into the time scale of the
ariables, whereas waelets consider both time and freDuency domain! There by using waelets
eliminate the limitations of the standard time series model!
Fi8 .1 M!>%r %i7 i:%r#in8 '%9n#ri$"
&ource' 8I3 Top world oil net importers, A*?AP
The
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T!)7$ .1 R$'$n# 7i#$r!#9r$ %n r$7!#i%n"+i: )$#G?7
A**AG+
Russia 03R and Co
integration
Russian economy is influenced significantly by
fluctuations in the oil prices and the real echange rate
%awson (A**H) ?@@?M?7
A**>M?
%ominican
Republic
Multiariate
regression model
and Cointegration
Increasing oil prices depreciate the peso
BenassyGuere
et al! (A**H)
?@HM?7
A**M??
"&3 Cointegration and
causality tests
Causality runs from the oil to the dollar!
Chen and Chen ?@HAM?7 #H Countries Cointegration Real oil prices may hae been the dominant source of
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0ene-uela significant negatie impact on the crude oil prices
Reboredo et al!
(A*?)
/anuary A*** to
May A*?A
8"R:$835
"5I:5(8"R),
3ustralia
(3"%), Canada
(C3%), /apan
(/$E), Meico
(MF5),
5orway (5:.)
and the "nited
.ingdom(#B$)
%etrended cross
correlation analysis
The crosscorrelation analysis indicated that in longer
time scales, oil price7echange rate correlations were
negatie and low
&econd, negatie dependence between oil and the "&
dollar increased after the onset of the global financial
crisis for all time scales
Compilation of 4iterature' 3ppended to the preious work of Tiwari et al! (A*?+)!8isting literature summari-es that oil price increase has significant negatie effect on stock returns (/ones and .aul, ?@@P &adorsky, ?@@@P .ilianand $ark, A**HP 5andha and
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$ortugal, and the ".
China, India, and
Russia
03R The impact of oil price shocks on stock prices in these l
5I8s is mied, partly in contrast to the effects on the "&
deeloped countriesL stock markets
#il3lana and
Eaya (A*?)
/anuary A*** to
%ecember A*??
5igeria 4ong memory
regression
model
The oil prices acting as a weakly eogenous ariable!
&ignificant eidence of a positie relationship between t
two ariables found though with a shortmemory effect
Madaleno and
$inho (A*?)
%ecember
?@@A to ?>
:ctober A*?A
9orld indices (M&CI
By &ectors)
Continuous time
waelets
6igher coherence among series for higher scales
supporting the interdependence hypothesis, showing
long run market dynamics are more uncertain! Bidirec
relationship between both series for large time hori-ons
:lson et al!
(A*?)
?st/anuary
?@>to Ath3pril
A*?+
"& Multiariate
olatility
#3RC6 models
such as B8..,
diagonal,
constant
conditional
4ow &=$ >** returns cause substantial increases in the
olatility of the energy inde! 9eak response from &=$
olatility to energy price shocks
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correlation, and
dynamic
conditional
correlation
&ukcharoen et al!
(A*?)
H /anuary ?@A
to +?%ecember
A**H
Canada, )
?>@'?*7
A*?+'?A
"&3 Timeseries The oil price is persistent and endogenous predictor ari
and negatie oil prices predict the "& stock returns mor
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6ypothesis of the study of the effect of the 9TI crude oil prices on macroeconomic indicators
of the oilimporting countries is formulated as follows'
The comoement between the crude oil prices on 8change rate of the oilimporting as follows'
H00: t!e co!erence coeicients bet2een t!e crude oil "rices and E+c!an%e rates are 3ero
The comoement between the crude oil prices on &tock Inde of the oilimporting countries as
follows'
H01: t!e co!erence coeicients bet2een t!e crude oil "rices and Stoc* indices are 3ero
.@. M$#+%;%7%8*
9e used continuous waelet transform in this study to eamine the macroeconomic series for
orthogonal waelet bases, where the choice is in between discrete and continuous! In analy-ing
macroeconomic data the waelet transform proides a three dimensional diagram that illustrates
time series information at different freDuencies, time, and strength! 9here the freDuency could
range from low to high, time could range from of short to long term and finally the strength of
association measured by color coding! In this study, we follow #rinsted et al! (A**) framework
of continuous waelet transform (C9T), cross waelet transform (F9T), and waeletcoherency (9TC)!
[email protected]. C%n#in9%9" !$7$# Tr!n"&%r
3 waelet is a function with -ero mean and that is locali-ed in both freDuency and time! The
C9T of a time series ( , nW ?,J, 5) with uniform time steps , is defined as the
conolution of with the scaled and normali-ed waelet, defined as
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( )( ) * !
(n
+ n
n
t n n t 2 s +
s s
=
(+!?)
9e define the waelet power as
A
( )n+
2 s!The comple argument of
( )n+
2 scan be interpreted as
the local phase! &ince the waelets are not completely locali-ed in time, C9T has edge effects to
addresses Cone of Influence (C:I) is introduced, where edge effects are ignored! The statistical
significance of waelet power can be assessed relatie to the null hypotheses that the signal is
generated by a stationary process with a gien background power spectrum ( )! 9e follow
the procedure used by Torrence and Compo (?@@) for data generation using MonteCarlo
simulation process! 3ccording to Torrence and Compo (?@@), regarding the white noise and red
noise waelet power spectra, under the null, the corresponding distribution for the local waelet
power spectrum at each time n and scalesis as
(+!A)
[email protected]. !$7$# '%+$r$n'$ (TC
9aelet coherence (9TC) is used as a tool for finding the relationships between two series! The
relationship of these series is found through freDuency bands and time interals! The waelet
coherence can be seen as a locali-ed correlation coefficient in time freDuency space! 9aelet
coherence of the change in the oil price and macroeconomic indicators differential series can be
defined as'
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T!)7$ . Fr$9$n'* i;$n#i&i'!#i%n
Ti$ S'!7$" (In D!*" Fr$9$n'i$" Fr$. D$"'ri:#i%n"
A 7
6igh &hort Run ?
? +A
Medium Medium Run+A 7
7 ?A
?A 7 A>
4ow 4ong RunA> ?*A
T!)7$ . !$7$# In&$r$n'$
:il price
=
8changerates &tock
Indices3rrowspointingtowards
Right In t!e "!ase7
Cyclical effect 7 $ositie 8ffect
"p 8change rates &tockIndices
4agging :il price
%own 8change rates &tockIndices
4eading :il price
4eft Anti4 out o t!e "!ase7 "p 8change rates &tockIndices
4eading :il price
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3nti cyclical effect 7 5egatie8ffect
%own 8change rates &tockIndices
4agging :il price
The time scales are classified as 6igh, Medium, and 4ow freDuency time scales! 9here 6igh
represents the shortrun dynamics, Medium represents the Medium run and the 4ow represents
4ong run! 3rrows pointing to the right indicates that the ariables, i!e!, benchmark oil prices andechange
