Investigating The Volatility Regime Switch And Volatility Spillover In International Oil Market

After 2003, international oil prices are going up and vary complexly, especially during global financial crisis(2007-2008), the international oil prices experienced a roller coaster with booms and busts. Since 2009, global financial crisis has eased gradually and world economy has begun to recover slowly. Meanwhile, both Brent and WTI(West Texas Intermediate) crude oil prices have entered into a new round of increase and volatility. And the abnormal price spreads between them have been identified. And the prices of Heating oil, Gasoline, Diesel oil and Fuel oil also rebounded in US market.Under this circumstance, this paper employs the Markov regime switching model with dynamic autoregressive coefficients to explore the price regimes of Brent and WTI after the financial crisis. Then it analyzes the causes of the abnormal spreads between the two benchmark crude oil prices based on the statistical observations of their typical regime differences. Then the VAR-GARCH-BEKK model is used to explore the volatility spillover effects between the oils of WTI and Brent, Heating oil,Gasoline, Diesel oil and Fuel oil.The results show that there are three main regimes in both Brent and WTI crude oil price returns, i.e., sharply downward, slightly downward and sharply upward regimes for Brent whilst sharply downward, relatively stable and sharply upward regimes for WTI.The typical price regimes of Brent and WTI are the "sharply upward" and "relatively stable" regimes after the financial crisis, respectively. Besides, their different movements in recent years are mainly attributed to their different market fundamental situations and the latest dynamics in crude oil markets, which ultimately lead to the occurrence of their abnormal price spreads.Two international crude oil WTI and Brent, the Diesel and Fuel oil are significantly affected by their history returns, but market performance of Gasoline and Heating oil has nothing to do with the past data. There are significant mean spillovers effects between all of the oil markets, suggesting that oil prices will take market information to other relevant markets. The spillover effects includes the two-wayspillover effect, and the one-way spillover effect.Finally, all the volatilities of oil prices returns are affected by their residual squares and conditional variance significantly. It shows that all prices volatilities vary because of short-run shock, and we can forecast the future conditional volatility using past long-run data. The results also indicate that market volatilities are more influenced by the past data of themselves, rather than short-run shocks.