Oil Price Forecasting Using Crack Spread Futures and Oil Exchange Traded Funds

Contemporary Economics, Vol. 9, No. 1, pp. 29-44, 2015

16 Pages Posted: 8 May 2015

See all articles by Hankyeung Choi

Hankyeung Choi

Government of the Republic of Korea - Ministry of Strategy and Finance

David J. Leatham

Texas A&M University - Department of Agricultural Economics

Kunlapath Sukcharoen

Texas A&M University - Department of Agricultural Economics

Date Written: April 1, 2015

Abstract

Given the emerging consensus from previous studies that crude oil and refined product (as well as crack spread) prices are cointegrated, this study examines the link between the crude oil spot and crack spread derivatives markets. Specifically, the usefulness of the two crack spread derivatives products (namely, crack spread futures and the ETF crack spread) for modeling and forecasting daily OPEC crude oil spot prices is evaluated. Based on the results of a structural break test, the sample is divided into pre-crisis, crisis, and post-crisis periods. We find a unidirectional relationship from the two crack spread derivatives markets to the crude oil spot market during the post-crisis period. In terms of forecasting performance, the forecasting models based on crack spread futures and the ETF crack spread outperform the Random Walk Model (RWM), both in-sample and out-of-sample. In addition, on average, the results suggest that information from the ETF crack spread market contributes more to the forecasting models than information from the crack spread futures market.

Keywords: oil price forecasting, crack spread futures, oil-related exchange traded funds, multivariate GARCH model

JEL Classification: C18, C58, G17, Q47

Suggested Citation

Choi, Hankyeung and Leatham, David J. and Sukcharoen, Kunlapath, Oil Price Forecasting Using Crack Spread Futures and Oil Exchange Traded Funds (April 1, 2015). Contemporary Economics, Vol. 9, No. 1, pp. 29-44, 2015 , Available at SSRN: https://ssrn.com/abstract=2603652

Hankyeung Choi

Government of the Republic of Korea - Ministry of Strategy and Finance ( email )

88 Kwanmun-ro, Kwacheon-si
Kyunggi-do, 427-725
Korea, Republic of (South Korea)

David J. Leatham

Texas A&M University - Department of Agricultural Economics ( email )

College Station, TX 77843-4218
United States
979-845-5806 (Phone)
979-862-1563 (Fax)

Kunlapath Sukcharoen (Contact Author)

Texas A&M University - Department of Agricultural Economics ( email )

College Station, TX 77843
United States

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