The dependence structure and causality detection in crude oil markets

ABSTRACT

It is essential to capture the dependence structure among the world’s dominant crude oil markets for understanding the world’s crude oil pricing mechanism. The dependence structure and interaction between Shanghai International Energy Exchange (INE) market and other major crude oil markets in the world are investigated to determine whether the world crude oil market is efficient. Using the vine copula model based on GARCH, we analyze the dependence structure and interactions among these markets. The highest dependence is found between West Texas Intermediate (WTI) and BRENT crude oil markets, displaying strong symmetric tail dependence. DUBAI market exhibits unidirectional Granger causality to WTI and INE markets. Empirical results suggest that the world crude oil markets are not efficient and are far from One Great Pool. DUBAI and Brent markets emerge as leaders in the current international crude oil pricing system, while INE markets do not significantly influence DUBAI and BRENT markets.

KEYWORDS:

• Vine copula
• crude oil prices
• non-linear Granger causality
• dependence structure
• GARCH

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors acknowledge funding support from Shaanxi Philosophy and Social Science Fund (Grant No. 2022D219) and China Scholarship Council Fund (CSC: 201908610028).