Relationship between Spot and Future Prices of Crude Oil: A Cointegration Analysis

Abstract

The study was intended to reveal the relationship among the spot and future price of crude oil, which in turn will help in determining the prices of crude oil. While structuring a portfolio, high correlation among assets alone cannot be taken as a satisfactory measure for long run diversification paybacks. There is a crucial need to enhance the traditional risk-return modeling methodologies by giving due consideration to common long term trends among the asset prices. Considering this pressing need, the present paper attempts to explore the long run and short run relationship between spot and future prices of crude oil using time series data. To estimate the long and short run dynamics of crude oil prices, the present study applies the Johansen cointegration, and vector error correction modelling to time series analysis.