Relationship between Indian Spot and Future Crude Oil Prices: A Phasewise Empirical Analysis

Abstract

The present article explores the dynamic relationship between the spot and future prices of crude oil commodity in Indian context. The prime objective of the study is to check the long-term and cause and effect relationship between the variables selected, that is, spot prices and future prices of crude oil. The objectives of the study are examined by employing Augmented Dickey–Fuller (ADF) test to check the stationarity, Johansen’s co-integration test for examining the long-term relationship and Granger causality test to know the cause and effect relationship between spot and the future prices of crude oil. The daily closing data is taken from 1 May 2005 to 31 December 2012 for the analysis. Since the period of financial crisis is considered, the entire period (May 2005–December 2012) is divided into three sub-periods, namely before crisis period (May 2005–August 2008), during crisis (September 2008–December 2010) and after crisis period (January 2011–December 2012). The findings of the study proved that the series derived from the future prices and cash market prices for crude oil were not stationary in the level form, but there is an evidence of stationarity in the first difference form. Empirical results found that there is unidirectional causality from spot return to futures return for before crisis period. For the during crisis period, there is bi-directional feedback from futures return to spot return and from spot return to futures return. A unidirectional relationship between spot returns and futures return for the period after crisis is also observed.