| This dissertation studies the spot and futures markets for crude oil. Its main objective is to study the relationship between these two markets, in particular. The role of crude oil futures market in the working of the spot market. A contribution of this dissertation is to provide a better understanding of the crude oil markets.;In order to investigate the relationship between the two markets, a two-stage testing procedure is proposed in this study. First, the existence of the relationship has to be tested. Second, after the relationship has been established, it will be tested to determine the direction of causality. Most of previous research on this issue has ignored the first step, and the existence of the relationship was taken for granted. Unfortunately, however, this assumption is not justified since it does not necessarily hold. Examples of this pitfall and misleading conclusions that follow are illustrated in this study.;The first relationship investigated in this study is between the crude oil spot and futures prices. This is known as the "price discovery" role of futures prices. Different assumptions about the futures market lead to different conclusions. For example, the random walk hypothesis states that futures prices do not provide information on the spot price. The market efficiency hypothesis, on the other hand, assumes the opposite conclusion. These two hypotheses are tested in this dissertation. It is found that spot price leads futures prices instead of the futures price providing information on the spot price. Therefore, the hypothesis that the futures prices have a price discovery role is rejected.;Two additional relationships to be studied are those between the OPEC oil supply and the futures prices and that between the same supply and spot prices. The hypotheses that there are co-integration relationships between the variables are rejected for both cases. In the case of OPEC supply and futures prices, if the existence of the relationship is assumed, as previous researchers did, and statistical methods are implemented to test the "relationship", controversial results are obtained. In the case of OPEC supply and spot prices, a "self-adaptive" model with supply interruption dummy variables is introduced to study the price behavior. It is found that prices follow an adaptive process, that is, the previous price information offers powerful influence on the current price. |
