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A threshold cointegration analysis of asymmetric adjustment of OPEC and non-OPEC monthly crude oil prices

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Abstract

The purpose of this paper is to analyze the dynamics of crude oil prices of OPEC and non-OPEC countries using threshold cointegration. To capture the long-run asymmetric price transmission mechanism, we develop an error correction model within a threshold cointegration and CGARCH errors framework. The empirical contribution of our paper specifies the cointegrating relation between OPEC price and non-OPEC prices and estimates how and to what extent the respective prices adjust to eliminate disequilibrium. The finding exhibits that the conditional volatility of variance has long-run memory feature and the shocks on the long-run component do not adjust quickly. The OPEC producers could not drive down (up) crude oil prices with equivalent speeds for all participants in the market. The slow adjustment of OPEC process of positive discrepancies to the long-run equilibrium indicates that OPEC does not prefer modest oil prices. While, the rapid adjustment of non-OPEC process signifies their preference of modest oil prices after oil price increases. These differences of speeds show evidence for competitive behaviors between OPEC and non-OPEC countries.

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Notes

  1. According to Enders and Siklos (2001), it is not necessary that the threshold coincides with the attractor. Then the appropriate estimate of \(\tau \) yields the lowest residual sum of squares.

  2. As demonstrated by Sichel (1993), a negative “deepness” (i.e., \(\left| {\rho _1 } \right| <\left| {\rho _2 } \right| )\) of \(\mathop {\hat{\varepsilon }} \nolimits _{t}\) implies that increases tend to persist, whereas decreases tend to revert quickly toward equilibrium.

  3. In the TAR adjustment, we have \(I_{t } \mathop {\hat{\varepsilon }} \nolimits _{t-1} =I_{t } \left( {\mathop {\hat{\varepsilon }} \nolimits _{t-1} \ge \tau } \right) \) and \((1-I_t )\mathop {\hat{\varepsilon }} \nolimits _{t-1} =I_{t } \left( {\mathop {\hat{\varepsilon }} \nolimits _{t-1} <\tau } \right) \); while in the MTAR adjustment: \(I_{t } \mathop {\hat{\varepsilon }} \nolimits _{t-1} =I_{t } \left( {\Delta \mathop {\hat{\varepsilon }} \nolimits _{t-1} \ge \gamma } \right) \) and \((1-I_t ){\mathop {\hat{\varepsilon }} \nolimits _{t-1}} =I_{t} (\Delta {\mathop {\hat{\varepsilon }} \nolimits _{t-1}} <\gamma )\).

  4. Combining the transitory and permanent equations, the model reduces to a non-linearly restricted CGARCH(2,2).

  5. The original CGARCH model defines the permanent component as a unit root process \(\left( {\rho =1} \right) \). However, Engle and Lee (1999) extend the model to a general specification allowing the permanent component to be a non-unit root process.

  6. This phenomenon appears when the differences in the interpretability of information from the crude oil market accentuate the competitiveness between the OPEC and non-OPEC producers.

  7. When the volatility of a long-run process is I(1) i.e., \(\rho =1\), then the conditional variance contains a unit root and the persistence of shocks is infinite. The Wald test for the null hypothesis \(\rho =1\) shows (Table 7) that the unit root is strongly rejected for models 1–2, and accepted for models 3–4. The LM-Arch and Ljung-Box tests reject the null hypotheses of Arch effect and the autocorrelation in the residuals (Table 7). Then, we should have correct estimates of the standards errors which validate the statistical tests.

  8. Using the nonparametric test statistics in the one-sample test framework, as Wilcoxon signed ranks and Van Der Waerden normal scores tests, for testing the null hypothesis of the equality of median to mean, we accept the alternative hypothesis. Consequently, the distribution of logged prices of OPEC and non-OPEC cannot be normally distributed. In addition, to check if the underlying data are normally distributed, we use the Quantiles-plot. The results indicate that the QQ-plots do not lie on a straight line, because the two distributions for each series deviate from linearity pattern and visually there are fat tails.

  9. Both of the properties of conditionally platykurtic and conditionally heteroscedastic might be combined in a single model like a regime switching model or multivariate distribution using mixed-normal conditional distributions (Holton Glyn 2014; Alexander and Lazar 2006). These ways will be explored in our next research paper and require further study.

  10. When the cointegrating vector is unique, the EG method is validated. But, when the cointegrating vector is not unique, we could work with VEC model.

  11. They indicate that if each of \(n\) series is I(1), but can be jointly characterized by \(k<n\) stochastic trends, then the vector representation of these series has \(k\) unit roots and \(\left( {n-k} \right) \) distinct stationary linear combinations i.e., cointegrating vectors.

  12. The heteroscedasticity test indicates that the ARCH effect is largely reduced using ECM-TAR-CGARCH (last row of Table 6, 7), this improvement of regressions is explained by the diminution of Skewness and Kurtosis coefficients.

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Acknowledgments

This paper has benefited considerably from the very helpful suggestions of the editor-in-charge, and of the anonymous referees. Nevertheless, the responsibility for any errors in the paper is ours.

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Authors and Affiliations

  1. Department of Economics, College of Economics & Islamic Finance, Umm Al-Qura University, PO Box 715, Mecca, 21955, Saudi Arabia

    Hassan Belkacem Ghassan

  2. Department of Research, Development & Consultancy, Institute of Bank Management, Mirpur-2, Dhaka, 1216, Bangladesh

    Prashanta Kumar Banerjee

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  1. Hassan Belkacem Ghassan
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Correspondence to Hassan Belkacem Ghassan.

Appendix

Appendix

See Tables 8 and 9 and Figs. 2, 3.

Table 8 World oil supply and demand barrels (per million day)
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Table 9 World oil production: OPEC and non-OPEC (%)
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Fig. 2
figure 2

OPEC and non-OPEC prices

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Fig. 3
figure 3

Persistence shocks over month’s horizon on OPEC and non-OPEC prices

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Ghassan, H.B., Banerjee, P.K. A threshold cointegration analysis of asymmetric adjustment of OPEC and non-OPEC monthly crude oil prices. Empir Econ 49, 305–323 (2015). https://doi.org/10.1007/s00181-014-0848-0

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