Causal Relationship Between Spot Price & Future Derivative Prices – Case of Crude Oil

Abstract

This research aims to examine the theoretical and empirical connections between current and future crude oil prices using cutting-edge econometric methods. It surveys existing literature and theoretical frameworks, exploring theories like arbitrage, market efficiency, and risk management techniques. The study then conducts a comprehensive empirical investigation using a large dataset, including data from extreme market volatility and other significant events in the financial world. Time series econometric methods like Granger causality tests, Vector Autoregression (VAR), and impulse response functions are used to capture the causal connections between spot and future prices. The analysis uncovers insights on lead-lag dynamics, volatility spillovers, and both short- and long-term causal impacts between current and future crude oil prices. Market fundamentals, geopolitical developments, and speculative behavior are also highlighted as influencing the causal relationships studied. The findings shed light on the link between future and current crude oil prices and provide valuable insights into the factors influencing these prices. This paper examines the relationship between future and spot crude oil prices, offering valuable insights for energy policy, risk management, hedging techniques, investment allocation, and governmental interventions.