Causality-in-variance of prices of oil products

Abstract

This paper investigates causality-in-variance between the price of crude oil and the prices of refined oil products using US data. The cross-correlation function is applied on both normal and abnormal squared standardized residuals. We found that causality-in-variance has a lead from crude price to gasoline prices for not more than 2 days, and has a lag from gasoline to crude of not more than 2 days. In addition to the daily causality pattern, the monthly causality pattern reveals that the lead-in-variance causation from crude price to refined products' prices and the lag-in-variance causation from refined products' prices to crude prices persist longer with abnormal squared shocks. These patterns suggest that market participants can advantageously adjust their positions within and across these markets.