SPILLOVER EFFECTS OF THE FUTURES CONTRACT PRICES OF THE NYMEX CRUDE OIL: A MULTIVARIATE GARCH APPROACH

Abstract

The main aim of this paper is to investigate spillover effects of the futures contracts prices of the Nymex Crude Oil. Tse and Tsui (2002) multivariate generalized autoregressive conditional heteroscedasticity model is used and a two-step MGARCH estimation of the two crude oil futures contracts prices of the New York Mercantile Exchange (NYMEX) is carried out. The results revealed of conditional volatility correlations between crude oil futures contract-3 and futures contract-4 of the NYMEX. The economic implication of this results is that a volatility of futures contract-4 could affect the volatility of futures contract-3 and vice-versa, which suggests that investment uncertainties associated with one of the contracts could foster investment uncertainties in the other contract which might raise the level of risks in the market and affect portfolio allocations of investors as well as firms' investment plans on the market. Therefore, the high level of volatility co-movements between the two series suggests that during the sample period there was high degree of volatility correlations between the two futures prices, which indicates that the forces driving the two futures prices of the NYMEX might be similar. Based on the finding of the study, the paper recommends that, authority concern should come up with appropriate policy that will reduce volatility correlations between crude oil future contracts.