Modeling the relationship between the oil price and global food prices

The growth of corn-based ethanol production and soybean-based bio-diesel production following the increase in the oil prices have significantly affect the world agricultural grain productions and its prices. The main purpose of this paper is to investigate the relationships between the crude oil price and the global grain prices for corn, soybean, and wheat. The empirical results show that the change in each grain price is significantly influenced by the changes in the crude oil price and other grain prices during the period extending from the 3rd week in 2005 to the 20th week in 2008 which implies that grain commodities are competing with the derived demand for bio-fuels by using soybean or corn to produce ethanol or bio-diesel during the period of higher crude oil prices in these recent years. The subsidy policies in relation to the bio-fuel industries in some nations engaging in bio-fuel production should be considered to avoid the consequences resulting from high oil prices.     

Forecasting the good and bad uncertainties of crude oil prices using a HAR framework

Good (or bad) uncertainty is the volatility that is associated with positive (or negative) innovations to asset prices. This paper proposes new heterogeneous autoregressive type (HAR-type) models to forecast the good and bad uncertainties of crude oil prices. In this paper we investigate the effects of lagged bad and good uncertainties, daily positive and negative signed jump variations, and leverages on predicting good and bad uncertainties by in-sample and out-of-sample analysis. The in-sample results show that bad and good uncertainties have long memory property, and the predictability of long-term good and bad uncertainties is stronger than that of short- and mid-term good and bad uncertainties. The out-of-sample results indicate that lagged bad (or good) uncertainties, daily positive signed jump variation, and daily negative signed jump variation contain incremental out-of-sample information for forecasting good (or bad) uncertainties, and in most cases lagged leverages also play indispensable roles in forecasting the good and bad uncertainties in the crude oil market. Moreover, the results of out-of-sample analysis remain robust across using the other estimation window, other HAR-type models, and the other sample.     

An empirical analysis of the relationship between oil prices and the Chinese macro-economy

Using the quarterly data from the first quarter of 1996 to the fourth quarter of 2014, this paper studies the relationship between oil prices and the Chinese macro-economy. We find output and interest rate respond significantly to oil price shocks. Further analysis reveals that the positive response of output to oil price shocks is attributed to the influences of oil price shocks on exports. The oil price shocks have both longer and deeper effects on the exports of state-owned enterprises than on those of foreign investment enterprises. Moreover, the response of exports to oil price shocks is symmetric. Finally, oil prices are found to be useful for forecasting the China's exports in the periods shorter than about two years.     

The dynamics of a nonlinear relationship between crude oil spot and futures prices: A multivariate threshold regression approach

This paper segments daily data from January of 1986 to April of 2007 into three periods based on certain important events. Both periods I and II indicate that the spot prices in general are higher than futures prices as was well-known in the literature. Only period-III (2001/9/11–2007/4/30) displays a reverse phenomenon: futures prices, in general, exceed spot prices. When the absolute value of a basis (futures-spot) is greater than the threshold value in the arbitrage area (regime 1 and 3), at least one of the error correction coefficients, representing adjustment towards equilibrium, is statistically significant. That is, there exists a tendency in the oil market in which prices move toward equilibrium. With respect to the short-run dynamic interaction between spot price change (Δs_t) and futures price change (Δf_t), our results indicate that when the spot price is higher than futures price, and the basis is less than certain threshold value (regime 3), there exists at least one causal relationship between Δs_t and Δf_t. Conversely, when the futures price is higher than spot price and the basis is higher than certain threshold value (regime 1), there exists at least one causal relationship between Δs_t and Δf_t. Finally, we use the method suggested by Diebold and Mariano [Diebold, Francis X., Mariano, Roberto S., 1995. Comparing predictive accuracy. Journal of Business and Economic Statistics 13 (3), 253–263] to compare the predictive power between the linear and nonlinear models. Our empirical results indicate that the in-sample prediction of the nonlinear model is clearly superior to that of the linear model.     

Investor attention and crude oil prices: Evidence from nonlinear Granger causality tests

Using the Google search volume index (GSVI) to measure investor attention, this paper investigates the relationships between investor attention and crude oil prices for the main crude oil markets worldwide. To account for possible structural breaks and nonlinearity in the relation between investor attention and oil returns, Fourier unit root test and nonlinear Granger causality tests are employed. The empirical results suggest that the bidirectional nonlinear Granger causality exists only between investor attention and WTI future crude oil return. However, WTI crude oil return Granger-causes investor attention weakly. For Dubai spot, Daqing spot, WTI spot and Brent future oil markets, unidirectional nonlinear Granger causality runs from investor attention to oil returns, which is relatively weak.     

Time-frequency contained co-movement of crude oil and world food prices: A wavelet-based analysis

This paper evaluates the association between crude oil prices and world food price indices, first within general space and time, and then within the combined time-frequency sphere. Monthly price data spanning from January 1990 to February 2016 were used for the analysis. The Johansen cointegration test conducted within the time domain confirmed the statistically significant cointegrated relationship between crude oil prices and the price indices of food and its sub-categories, such as dairy, cereals, vegetable oil, and sugar; however, frequency information was not accounted for. To incorporate both the time and frequency features of the data, we used a wavelet method that has shown that the world food prices, along with the prices of cereals, vegetable oils, and sugar, co-move with and are led by crude oil prices, results that remain relevant from the short-run policy perspective. The outcome of Toda–Yamamoto causality confirmed the spillover of crude oil price changes to the world food price index also in the long run. The paper ends with the policy implications of these results.     

The impact of oil prices on GDP in European countries: An empirical investigation based on asymmetric cointegration

This paper investigates the existence of a long-term relationship between oil prices and GDP in 12 European countries. To account for the fact that economic activity responds asymmetrically to oil price shocks, we propose an approach based on asymmetric cointegration. Our results show that, while standard cointegration is rejected, there is evidence for asymmetric cointegration between oil prices and GDP in the majority of the considered European countries.     

Option prices and implied volatility in the crude oil market

This paper studies the determinants of WTI crude oil call option prices with a special emphasis on the relationship between implied volatility and moneyness. Our first-stage regression estimates a quadratic approximation of implied volatility as a function of moneyness, while our second-stage regression investigates correlations between the estimated parameters and a list of explanatory variables. The first-stage regressions show a positive coefficient on the quadratic term, suggesting that the market exhibits ‘Implied Volatility Smile’ and hence violates the Black-Scholes predictions. The main results of our paper concern the determinants of these violations. We find that the curvature of implied volatility as a function of moneyness is: (i) positively and significantly correlated with basis and hedging pressure of the underlying crude oil futures contract (ii) positively and significantly correlated with various measures of transaction costs on the options market. We explore various explanations for these results. The paper also contains a variety of robustness checks, mostly related to the assumed functional forms.     

US demilitarization and global warming : An empirical investigation of the environmental peace dividend

In the paper input-output methods are used to generate ballpark empirical estimates of the implications for global warming of the projected demilitarization of the US federal budget. The impact is found to be qualitatively ambiguous, and highly sensitive to the manner in which the funds saved are distributed. The effect is adverse where the budgetary savings are used to fund economy-wide cuts in personal taxation and/or deficit reduction. In other cases the effect may be neutral or beneficial.     

Re-examining the movements of crude oil spot and futures prices over time

We carry out a (partial) replication exercise of Chang and Lee (2015) unit root and cointegration analyses of crude oil spot and futures prices. In doing so, we offer an updated and expanded analysis based on a much wider set of oil futures series than that considered by Chang and Lee, and we consider the impact of different temporal aggregation methods. Although we are not able to exactly replicate their findings, we nonetheless reach qualitatively similar findings to theirs when using their dataset in terms of the long-run properties and interactions of the spot and futures prices data. Likewise, qualitatively comparable results are obtained when using our expanded dataset. However, a number of important qualitative differences from Chang and Lee arise in terms of the analysis of causality between spot and futures contract prices. As part of our replication exercise we also investigate some aspects that were not originally considered by Chang and Lee. In doing this, we find that both the variability of futures prices as well as the speed of adjustment of futures/spot price differentials increase as the maturity of the contracts increase.     

Forecasting the real prices of crude oil under economic and statistical constraints

Forecasting the real oil prices is important but notoriously difficult. In this paper, we apply both economic and statistical restrictions to parameters of predictive regressions of real oil prices. We employ two popular criteria, mean predictive error (MSPE) and success ratio, to evaluate forecasting accuracy. Our out-of-sample results show that the benchmark of no-change model can be significantly outperformed by a model selection strategy with restricted models for longer horizons. The revealed predictability is further demonstrated to be robust to the adjustment of estimation windows and to an alternative benchmark model.     

World oil and agricultural commodity prices: Evidence from nonlinear causality

The increasing co-movements between the world oil and agricultural commodity prices have renewed interest in determining price transmission from oil prices to those of agricultural commodities. This study extends the literature on the oil–agricultural commodity prices nexus, which particularly concentrates on nonlinear causal relationships between the world oil and three key agricultural commodity prices (corn, soybeans, and wheat). To this end, the linear causality approach of Toda–Yamamoto and the nonparametric causality method of Diks–Panchenko are applied to the weekly data spanning from 1994 to 2010. The linear causality analysis indicates that the oil prices and the agricultural commodity prices do not influence each other, which supports evidence on the neutrality hypothesis. In contrast, the nonlinear causality analysis shows that: (i) there are nonlinear feedbacks between the oil and the agricultural prices, and (ii) there is a persistent unidirectional nonlinear causality running from the oil prices to the corn and to the soybeans prices. The findings from the nonlinear causality analysis therefore provide clues for better understanding the recent dynamics of the agricultural commodity prices and some policy implications for policy makers, farmers, and global investors. This study also suggests the directions for future studies.     

An empirical analysis of the risk of crude oil imports in China using improved portfolio approach

This paper quantifies the diversification index of China's crude oil imports during the period 1996–2004, and explores the relationship between the monthly prices and Brent crude oil cash prices. Accordingly, we calculate the systematic and specific risks using portfolio theory of China's crude oil import over the period 1996–2004. Because China's crude oil import increased rapidly since 1996, we improve upon the traditional portfolio theory and develop a risk index model of portfolio theory for crude oil imports in order to explore objectively the changes in China's crude oil import risks. The results show that China's crude oil import risk is affected extensively by the fluctuation of international oil prices. So the traditional portfolio theory is insufficient to measure China's crude oil import risk. The improved portfolio theory risks index model reflects the effect of international oil prices, diversification, imports, and geopolitics factors etc., on crude oil import risk, and changes in crude oil import risk. Therefore, the risk index model of portfolio theory provides greater theoretical and methodological robustness as an indicator of China's crude oil import security than that offered from the application of traditional measures of dependence.     

Oil prices,SUVs, and Iraq: An investigation of automobile manufacturer oil price sensitivity

There has been much speculation about the recent upsurge in crude oil prices and the effect it will have on the economy and business. The objective of this paper is to investigate the relationship between oil prices and stock prices of automobile manufacturers. We add an oil price factor, measured alternatively by the excess change in WTI crude oil prices or the excess return on an energy ETF, to the Fama–French three-factor model over the period March 20, 2001 to September 30, 2008. Our dependent variable is the excess return on a price-weighted index of automobile manufacturers. Results indicate that oil prices add value to the pricing model, particularly for manufacturers specializing in SUVs and for a subperiod following the Iraq invasion on March 19, 2003.     

An investigation of oil prices impact on sovereign credit default swaps in Russia and Venezuela

In this paper, we study the impact of oil price returns on sovereign Credit Default Swaps (CDS) spreads for two major oil producers, Russia and Venezuela. Using daily spreads from 2008 to 2015 through a Time Varying Transition Probabilities Markov Switching model, our results show that crude oil price and its volatility are critical determinants of their sovereign debt. We highlight some differences between the two countries, depending on the state of the economy. Moreover, global and local factors play a major role in the determination of sovereign CDS spreads.     

A broadened causality in variance approach to assess the risk dynamics between crude oil prices and the Jordanian stock market

Within the new developed causality-in-variance approach, this paper builds up a broad methodological framework to more accurately capture the risk spillover effects between global oil prices and Jordanian stock market returns during the period 1 March 2003–31 January 2014. The sample period is divided, on the basis of the 2008 financial crisis, into pre-crisis and post-crisis periods. Results for the pre-crisis period show a lack of risk spillovers between global oil and the Jordanian stock market. After the crisis, however, we find evidence for one-way risk spillover running from the oil market. These findings have implications for the design of appropriate asset allocation and regulatory policies to manage risk spillover effects.     

Causes for an asymmetric relation between the price of crude oil and refined petroleum products

We revisit the issue of asymmetries in the relation between the price of crude oil and refined petroleum products in the United States. An econometric analysis of monthly data indicates that the asymmetric relation between the price of crude oil and motor gasoline is generated by refinery utilization rates and inventory behavior. The asymmetric relation between the price of crude oil and home heating oil probably is generated by contractual arrangements between retailers and consumers. Together, these results imply that price asymmetries may be generated by efficient markets. Under these conditions, there is little justification for policy interventions to reduce or eliminate price asymmetries in motor gasoline and home heating oil markets.     

Energy performance ratings and house prices in Wales: An empirical study

This paper investigates the effect of Energy Performance Certificate (EPC) ratings on residential prices in Wales. Drawing on a sample of approximately 192,000 transactions, the capitalisation of energy efficiency ratings into house prices is investigated using two approaches. The first adopts a cross-sectional framework to investigate the effect of EPC rating on price. The second approach applies a repeat-sales methodology to investigate the impact of EPC rating on house price appreciation. Statistically significant positive price premiums are estimated for dwellings in EPC bands A/B (12.8%) and C (3.5%) compared to houses in band D. For dwellings in band E (−3.6%) and F (−6.5%) there are statistically significant discounts. Such effects may not be the result of energy performance alone. In addition to energy cost differences, the price effect may be due to additional benefits of energy efficient features. An analysis of the private rental segment reveals that, in contrast to the general market, low-EPC rated dwellings were not traded at a significant discount. This suggests different implicit prices of potential energy savings for landlords and owner-occupiers.     

Nonparametric panel data model for crude oil and stock market prices in net oil importing countries

This paper introduces an innovative nonparametric panel data approach to model the long-run relationship between the monthly oil price index and stock market price indices of ten large net oil importing countries; namely, the United States, Japan, China, South Korea, India, Germany, France, Singapore, Italy and Spain. In the proposed model, we allow the coefficient on the oil price index to be a time-varying function which evolves over time in a way that is assumed to be unknown. We also allow the common trend function to evolve over time, as well as extending the model further to incorporate country-specific trend functions. We employ a data-driven local linear method to estimate these time-varying trend and coefficient functions. The results show that, despite being largely positive, there are several downward trends, reflecting the aftermath of the Iraq war and the recent unprecedented drop in the oil price. Overall, we find that the nonparametric panel data model better captures the way in which the underlying stock-oil price relationship has evolved over time in comparison to the point estimates of the parametric counterpart. Moreover, we find that stock market fundamentals play a significant role in determining the oil-stock price relationship. Our findings have important implication for policymakers and financial speculators.