Modeling the United States crack spread: Market efficiency, persistence and the Verleger hypothesis

ABSTRACT The price formation of crude oil and its refined products plays an essential role in the global economic system and mainly in the United States, where any shock on this market has implications for the different concerned parties. In this sense, we employ the fractionally cointegrated vector autoregressive model to analyze the long-run relationship between crude oil and each refined product and the persistence of the error term resulting, i.e., the crack spread, simultaneously. Once the cointegrating relationships between crude oil price and each refined product price are tested, we also evidence that the order of integration of the crack spread displays a long memory process. Finally, by attending to the coefficient adjustments, supply-driven market integration is given. Additionally, the Verleger hypothesis is rejected for all refined products, corroborated by the component share. This paper has important policy implications for investors, energy policymakers and refiners.