Chain of Cointegration in the Refined Products Market : From Crude Oil Spot to Gasoline Futures

Using multiple econometrics methods, this paper examines the cointegration and causality relationships between the futures prices of gasoline and the spot prices of two major types of crude oil (i.e. WTI and Brent). The existence of cointegration between prices in adjacent markets, crude oil spot and gasoline spot as well as gasoline spot and gasoline futures, has been shown by the previous research. Our research extends the literature by scrutinizing the transitivity property of cointegration in the chain of crude oil spot, gasoline spot, and gasoline futures markets. Among other results, we observe a bi-directional short-term causality between crude oil and gasoline prices. However, we only find a uni-directional long-run causality from gasoline futures contracts to crude oil spot prices (and not vice versa). Consistent with the latter, the impulse responses of gasoline futures prices to crude oil spot shocks are decaying; whereas, the response of spot prices to shocks to all gasoline futures prices is persistent. We also report some distinctions between the estimated cointegration vectors for WTI and Brent crude oil types