Understanding Crude Oil Spot and Futures Prices Dynamics During Major Crises

This thesis examines crude oil, the dominant energy resource worldwide, its historical behaviour and the resulting implications for world economies. It analyses the role of spot and futures oil prices and their dynamics during periods of market uncertainty. The focus of attention is the understanding of the lead-lag relationship of crude oil spot and futures prices during major crises periods (the first Gulf War in 1990/91, the Asian financial crisis in 1997/98, the US terrorist attack in 2001 and the global financial crisis in 2008/9), and its implications for investors and policy-makers. The mix of applied econometric models gives strength to this study by offering a rich research framework that helps in the analysis and examination of core research outcomes. The study uses daily data to capture fluctuations in the oil markets, more specifically daily closing spot prices and continuous futures prices from 1982 until 2016. The selected research approach identifies oil prices dynamics and their variations in behaviour during periods of magnified distress such as economic and financial crises. The diversity of approaches is important as they offer an in-depth perspective on oil prices behaviour and how major economic and financial events have impacted on prices behaviour. Different sub samples and time periods are considered for this study, and they are identified by the implementation of structural break tests and moving window approaches. Long run and short run interlinkages are examined by using the Johansen, Engle-Granger and Vector Error Correction models that gave us sufficient evidence to test both spot and futures prices and how their behaviour differs at different points in time. GARCH and OLS models are applied to support the volatility analysis and the variance ratio tests together with bootstrapping and simulation methods that are the basis of the efficiency part of the study. The results show evidence of a bidirectional long term relationship between crude oil spot and futures prices for all sub periods. However, the short term relationship provides different outcomes, where for stable and post-crises periods futures prices seem to have a leading role, while spot prices appear to be leading during crises periods. This research outcome can be considered as a major contribution of this study, as it offers very interesting information and insights to investors and oil dependent industries, as they can follow either spot or futures prices depending on the length of their business strategy and oil price levels during different financial and economic episodes. The volatility analysis reveals that crises triggers play an important role in volatility examination, where in cases of economic and financial distress the volatility persistence lasts longer with lower volatility spikes, which is in contrast with fundamental triggers of supply and demand, where the increased volatility does not last as long, but shows evidence of clearly higher volatility spikes. The conducted analysis looking at market efficiency suggests that crude oil markets are efficient in the short run, but not in the long run, which can be due to the high number of structural breaks identified in the analysed sample and which are caused by the registered high oil market volatilities over time. These findings offer interesting insights regarding the lead-lag relationship between spot and futures prices of the main crude oil benchmarks during different crises, which can be used by academics, oil market participants, policy-makers and speculators. The main contribution of this thesis results is the understanding of the relationship and dynamics for business and strategic investment decisions through risk management and long term planning, especially for economies that are highly dependent on oil as their main energy source