Post by Sapphire Capital on Feb 18, 2009 22:25:18 GMT 4
Tractability of NYMES's Oil Crack Spread Futures Contract
Pete Locke
Texas Christian University
Pattarake Sarajoti
Sasin GIBA of Chulalongkorn University
Tearasuit Puthpongsiriporn
Sasin GIBA of Chulalongkorn University
February 2009
Abstract:
The New York Mercantile Exchange (NYMEX) offers a series of oil-related crack spread futures contracts to help market participants better manage their price risk requirements in the oil market. This paper applies autoregressive multivariate cointegration technique to demonstrate the price relationship among crude oil, heating oil, and unleaded gasoline future contracts over the period of January 1985 through December 1999. As expected, the test results show that the prices of these futures contracts are cointegrated over the long term. More importantly, the test results on error correction model show that the prices of these futures contracts did response to the short-term deviations in the refining margin and more quickly to the short-term deviations from the NYMEX's the crack spread margin. Therefore, the results suggest that market participants were using the NYMEX's crack spread margins represent as a benchmark to reflect their expectations about the equilibrium in the price relationship among the oil product future contracts. In addition, there seems to be overreaction in market participants to short term deviation in the price relationship.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1344831_code1159780.pdf?abstractid=1328126&mirid=1
Pete Locke
Texas Christian University
Pattarake Sarajoti
Sasin GIBA of Chulalongkorn University
Tearasuit Puthpongsiriporn
Sasin GIBA of Chulalongkorn University
February 2009
Abstract:
The New York Mercantile Exchange (NYMEX) offers a series of oil-related crack spread futures contracts to help market participants better manage their price risk requirements in the oil market. This paper applies autoregressive multivariate cointegration technique to demonstrate the price relationship among crude oil, heating oil, and unleaded gasoline future contracts over the period of January 1985 through December 1999. As expected, the test results show that the prices of these futures contracts are cointegrated over the long term. More importantly, the test results on error correction model show that the prices of these futures contracts did response to the short-term deviations in the refining margin and more quickly to the short-term deviations from the NYMEX's the crack spread margin. Therefore, the results suggest that market participants were using the NYMEX's crack spread margins represent as a benchmark to reflect their expectations about the equilibrium in the price relationship among the oil product future contracts. In addition, there seems to be overreaction in market participants to short term deviation in the price relationship.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1344831_code1159780.pdf?abstractid=1328126&mirid=1