Time-varying lead–lag structure between the crude oil spot and futures markets

Abstract

The linkages between crude oil spot and futures markets are widely studied in previous literatures. Most of these conventional methods are static, linear and parametric. In order to overcome this difficulty, we employ the nonparametric and nonlinear symmetric thermal optimal path (TOPS) method to determine the time-dependent lead–lag relationship between two time series. Based on the daily, weekly, monthly spot and futures returns for maturities of one, two, three and four months of the West Texas Intermediate (WTI) crude oil benchmark, we apply the TOPS method together with self-consistent test to investigate the time-varying lead–lag dependences between spot and futures markets from 1987 to 2017. We find that, for total three data sets with different frequencies, the TOPS paths indicate an alternate lead–lag structure instead of a dominance between spot and futures markets in most of the time periods. For the daily data, the lead–lag relationship between the two markets exists within one day except on some specific days. Moreover, without considering the units of time, on average, the lead–lag steps between the two markets are diminishing with the increasing frequency. Roughly speaking, these periods with strong lead–lag signals coincide with major influential changes in the oil and stock markets and the geopolitics, which can reflect real economic, financial and geopolitical regime changes. All in all, the results show that the lead–lag relationship between the spot and futures oil markets exists only temporarily.