Abstract
Based on daily returns, we comprehensively characterize the lead-lag relationship between Brent and WTI crude oil spot markets from 1987 to 2017 with the non-parametric symmetric thermal optimal path (TOPS) method. The empirical results indicate that WTI spot price leads Brent spot price slightly, which provides support to the price leadership of WTI over Brent. However, the lead-lag relationship is volatile and sensitive to extreme events like geopolitical conflict and policy shift. Due to the concerns about future oil supply triggered by the two Gulf wars, both WTI and Brent experienced extreme uncertainty and co-moved closely during wartime. Notably, the TOPS method captures the structural break in the WTI-Brent price spread in 2011 which is influenced by the U.S. oil export ban and transportation bottleneck. After the lift of the ban, the two benchmark prices have reconnected. The lead-lag signals basically coincide with major influential changes in the oil markets, which suggests that the TOPS method provides a viable approach to reflecting the impact of extreme events on the crude oil prices motion.
Highlights
Brent and Western Texas Intermediate (WTI) are the two predominant benchmarks for crude oil in global markets
We investigate the time-dependent lead-lag relationship between the Brent and WTI crude oil spot price during 1987–2017 via the symmetric thermal optimal path (TOPS) method developed by Meng et al [17]
This paper comprehensively investigates the lead-lag relationship between Brent and WTI crude oil spot prices from 20 May 1987 to 10 October 2017 based on the TOPS method
Summary
Brent and Western Texas Intermediate (WTI) are the two predominant benchmarks for crude oil in global markets. Their price relationship has been changeable all the time. Kao and Wang [2] trace the changing path of WTI information share from 1991 to 2009. Their results demonstrate that WTI has lost the status of leading price to Brent since 2004. Coronado et al [5] apply a one-tailed non-parametric Granger causality test to study the co-movements for oil prices and alert a bi-directional feedback pattern between Brent and WTI from 2013 to 2015
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