Modelling the Interconnectedness and Lag Effects in Crude Oil Price Benchmarks
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Abstract
This study focuses on analyzing the dynamic interaction of crude oil price benchmarks with emphasis on investigating the short and long-term impact of changes in the crude oil price benchmark and select an appropriate model for modeling the interaction of crude oil Brent, crude oil Dubai and crude oil West Texas Intermediate oil price benchmarks. To achieve this, the Autoregressive Distributed Lag (ARDL) model with monthly data from May, 1994 to March 2024 was introduced. Preliminary investigation such as unit root test, ARDL bound test together with ARDL model estimation were conducted on the study variables. The result confirms strong evidence of time-varying interdependence between COB, COD and COWTI. COWTI is negatively related to its second and third lags. This means that past innovations in COB and COD have great influence on present changes in COWTI. The first lag of COD is also negatively correlated with COWTI. However, COB and COD influence COWTI in a positive way. In the long run there is no interconnection between COB, COD and COWTI. More so, the combine lags of COWTI (-1), COWTI (-2) and COWTI (-3) significantly caused own shocks in the short-run. Since own shocks have been identified as determinants of impulse. Some recommendations were made.
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References
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