Efficiency in the crude oil futures market

Abstract

This paper addresses the issue of “simple efficiency,” which states that the futures price is an unbiased predictor of the spot price, in the case of trading in crude oil futures at NYMEX. This issue received considerable attention in the literature using cointegration analysis. This paper, however, explicitly deals with the crash in 1986, which is built into the analysis as a structural break following Perron (1989), and, more importantly, analyzes the trivariate system of spot-futures-posted prices in addition to bivariate spot-futures and spot-posted systems. The results indicate that the futures price of light sweet crude oil traded at NYMEX plays a significant role in price discovery. This observation is also supported by the widespread use of the futures price as a benchmark all over the world as well as by the decision of the U.S. Minerals Management Service to switch to the futures price from the posted price as the standard for calculating royalties.