Abstract
This study utilizes an Autoregressive Distributed Lag model to investigate the nature of crude oil futures price pass-through since 2006. The empirical results reveal a very high but incomplete short-run pass-through rate from the crude oil futures price to the gasoline futures price of 0.849298 with a corresponding negative long-run pass-through rate of -0.2440894. These empirical findings suggest that traders in the U.S. oil and gasoline futures markets overreact to fluctuations in the crude oil futures price as evidenced by subsequent corrections made over the sample period. The result of the bounds test for a long-term relationship between these two futures prices is inconclusive. The empirical findings further suggest that U.S. futures market traders considered futures prices of gasoline three weeks earlier in determining the current trading price while taking only one week to respond completely to the shock in the crude oil futures price. The empirical findings of this investigation may address the core elements of the price dynamics of the crude oil and gasoline futures markets and advance inquiry into assessment tools that could manage a very complex market challenge, especially for policy makers in countries with transitional economies in Eastern Europe, Caucasus and Central Asia.
Highlights
Gasoline, which is derived from crude oil, is arguably one of the most important commodities used in any modern industrial economy
Fluctuations in gasoline prices directly impact consumer spending habits and have an effect on which cars consumers choose to buy and even how close they choose to live near their workplace
Central bankers in turn are concerned with how changes in gasoline prices impact inflation expectations, consumer spending, and consumer confidence (Yellen, 2011)
Summary
Gasoline, which is derived from crude oil, is arguably one of the most important commodities used in any modern industrial economy. In the age of globalization and given the outsourcing phenomenon, gasoline has been used more and more in emerging and transitional economies. Fluctuations in gasoline prices directly impact consumer spending habits and have an effect on which cars consumers choose to buy and even how close they choose to live near their workplace. Central bankers in turn are concerned with how changes in gasoline prices impact inflation expectations, consumer spending, and consumer confidence (Yellen, 2011). The recent historic rise and fall in retail gasoline prices across the U.S has led to greater interest in how the gasoline market works and how gasoline prices are determined. Cycles of gasoline prices increasingly affect transitional and emerging economies
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