Shock Propagation Across the Futures Term Structure: Evidence from Crude Oil Prices

42 Pages Posted: 30 Apr 2014 Last revised: 18 May 2018

See all articles by Delphine Lautier

Delphine Lautier

University Paris Dauphine

Franck Raynaud

Lausanne University, Swiss Institute of Bioinformatics

Michel A. Robe

University of Illinois at Urbana-Champaign

Multiple version iconThere are 2 versions of this paper

Date Written: March 26, 2018

Abstract

To what extent are futures prices interconnected across the maturity curve? Where in the term structure do price shocks originate, and which maturities do they reach? We propose a new approach, based on information theory, to study these cross-maturity linkages and the extent to which connectedness is impacted by market events. We introduce the concepts of backward and forward information flows, and propose a novel type of directed graph, to investigate the propagation of price shocks across the WTI term structure. Using daily data, we show that the mutual information shared by contracts with different maturities increases substantially starting in 2004, falls back sharply in 2011-2014, and recovers thereafter. Our findings point to a puzzling re-segmentation by maturity of the WTI market in 2012-2014. We document that, on average, short-dated futures emit more information than do backdated contracts. Importantly, however, we also show that significant amounts of information flow backwards along the maturity curve – almost always from intermediate maturities, but at times even from far-dated contracts. These backward flows are especially strong and far-reaching amid the 2007-2008 oil price boom/bust.

Keywords: Mutual information, Market integration, Shocks propagation, Information entropy, Shock Propagation, Directed graphs, Term structure, Futures, Crude oil, WTI

JEL Classification: Q02, G10, G13, G14, Q40

Suggested Citation

Lautier, Delphine and Raynaud, Franck and Robe, Michel A., Shock Propagation Across the Futures Term Structure: Evidence from Crude Oil Prices (March 26, 2018). Available at SSRN: https://ssrn.com/abstract=2430168 or http://dx.doi.org/10.2139/ssrn.2430168

Delphine Lautier (Contact Author)

University Paris Dauphine ( email )

place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

Franck Raynaud

Lausanne University, Swiss Institute of Bioinformatics ( email )

bugnon 27
Lausanne, 1011
Switzerland

Michel A. Robe

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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