Synopsis of

OIL PRICE DETERMINANTS AND CO-MOVEMENT DYNAMICS

A THESIS

to be submitted by

SRINIVASAN N

for the award of the degree

of

MASTER OF SCIENCE
(By Research)

DEPARTMENT OF MANAGEMENT STUDIES

INDIAN INSTITUTE OF TECHNOLOGY MADRAS, INDIA
FEBRUARY, 2016

OIL PRICE DETERMINANTS AND CO-MOVEMENT DYNAMICS

1. INTRODUCTION
Crude oil is the key driver of a nations economy and volatility in oil price leads to potential
ramifications over a countrys economy and its financial markets. Previous research has
focused more on the impact of demand and supply factors influencing oil price. Oil being one
of the highly traded commodities in the world with high participation from financial
institutions in the derivative segment, speculation in crude oil options and futures can play an
active role in establishing the crude oil price. Precise estimation of the factors that affect the
crude oil price helps in understanding the dynamics of crude oil price movements and helps
in managing the risk pertaining to volatile oil prices. Oil price series exhibit structural breaks
and non-linearity (Reboredo, 2010) and may exhibit dynamic behavior with respect to the
financial events such as crisis, changes in government policy, changes in the business cycles
and economic downturns. The economy becomes more difficult to manage when oil prices
remain highly volatile, as higher volatility in crude oil prices, have greater ramifications for
different players in the economy and managing current account balance for governments
becomes a challenge. The determinants of crude oil price in high-volatile period might be
different from low-volatile period, and may differ during different economic phases. Hence,
an attempt is made in this study to examine the effect of fundamental, financial and
speculative factors on crude oil prices during high and low volatile regimes.
Fluctuations in crude oil price impacts macroeconomic factors such as growth rate, interest
rate, inflation and exchange rate. Crude oil is actively included in the portfolio of various
hedge funds and variability in oil price has significant linkage with various macroeconomic
indicators of a country. Oil price has influence on a countrys economic growth and thus on
inflation and interest rate. Oil prices affect the stock prices either directly by influencing
future cash flows of a company or indirectly by affecting the interest rate that is used to
discount the future cash flows of a company. Change in stock prices and exchange rates also
impacts oil prices. But, the nature and extent of relationship between oil price and
macroeconomic indicators may vary from time to time and understanding the pattern of
relationship across time and frequency horizon becomes essential for traders and investors.
Hence, we attempt to examine the co-movement between (i) oil price and stock index and (ii)
oil price and exchange rate to capture the pattern of relationship across different time horizon.

2. LITERATURE REVIEW AND MOTIVATION OF THE STUDY

2.1 Factors influencing Crude Oil

Most of the previous studies focused on oil supply and demand factors and provide evidence
that fundamental factors are the key drivers of oil prices (Chevillon and Rifflart, 2009;
Peltonen et al., 2011). With respect to crude oil, supply factors such as OPEC production
(Chevillon and Rifflart, 2009) and OECD inventory are found to have inverse relationship
with oil prices. In the demand side, most of the studies have used only OECD consumption
and OECD net imports for determining the residual demand shock and these shocks are found
to have positive impact on oil prices (Kilian and Lee, 2014). Since past studies considered
only shocks and studied their effect on oil price, the main effect of OPEC production, OECD
inventory, OECD consumption and OECD net imports individually has been ignored.
Moreover, previous studies paid little attention to the demand from emerging markets. Hence,
there is a need to empirically examine the effect of individual supply related variables such as
OECD inventory and OPEC production and demand related variables such as OECD
consumption and OECD net imports. But, considering OECD consumption alone is not
appropriate, since it excludes major oil consuming countries like China and India. Hence, use
of proxy variables to account for the increasing consumption from emerging economies such
as China and India is pertinent to capture the global consumption effectively.
Contemporary research in the field of oil price dynamics indicates that financial factors also
affect oil price apart from fundamental factors. Many studies have shown significant impact
of exchange rate on crude oil prices (Basher et al., 2012; Beckmann and Czudaj, 2013), but
most of them have used NEER (Breitenfellner et al., 2009), REER (Oriavwote and Eriemo,
2012; Breitenfellner et al., 2009) and US dollar exchange rate, which is based on the
transaction between US and its trading partners. Examining the impact of effective exchange
rate of dollar index has limitations in accounting for the global trading of oil in dollars.
However, using a comprehensive measure such as Dollar index (broad) would capture the
complete dynamics of oil trading. Hence, it is pertinent to examine the impact of dollar index
(broad) on oil price than looking at the impact of effective exchange rate on oil prices.
Prior research have also found significant impact of stock index on crude oil prices (Basher
et al., 2012; Cifarelli and Paladino, 2010; Breitenfellner et al., 2009). With the advancement
of financialization, forward and futures market impact oil prices. If the expected future oil
spot price is greater than the futures price, there will be a premium to extract oil from well.
But, the impact of spread between the current spot price and a year ahead futures price of oil
has not been considered by prior studies. Considering 12-month basis which measures the
premium of holding/ storing a crude oil rather than a derivative product may provide more
insight on crude oil price discovery.
Sornette et al., (2009) postulated that the oil price shocks during crisis are due to speculative
factors and speculative trading can influence the oil prices without any change in
fundamental factors (Hamilton, 2008). Speculation variable such as feedback trading was
found to have negative effect on oil prices (Cifarelli and Paladino, 2010). While, noncommercial net long positions (futures) are found to have positive effect oil price (Fattouh et
al., 2012). With the use of call option and put option and extensive building up of positions in
put or call can impact oil prices significantly. Hence, capturing speculation ignoring options
will not be meaningful. Speculative activity based on non-commercial net long positions
(futures and options) may capture the impact of speculation on oil price more effectively.
3

Oil price series exhibit structural breaks and non-linearity (Reboredo, 2010) and may exhibit
dynamic behavior with respect to the financial events such as crisis, changes in government
policy, changes in business cycles and economic downturns. As the behavior of the oil price
determinants change over time, understating the oil price and its determinants behavior with
respective regimes becomes crucial. Using ordinary regression model fails to identify the
dynamic linkage between oil prices and its determinants across regimes. Most of the existing
literatures examine the relationship using traditional linear time series models such as VAR/
VECM, co-integration and structural VAR. However, oil price is found to have structural
breaks and may not be linear and most of the studies examine casual/ long term relationship
of crude oil with only one or few variables. Linear models could suffer from possible
misspecification or omitted variable bias and the relationship between oil price and
determinants may vary over time. Incorporating or using the model, which accounts for
structural break and capturing the effect at different periods would help in accurate estimation
of oil price. Very few studies have used nonlinear models such as CCC - GARCH-M and
Bayesian Model averaging (Breitenfellner et al., 2009). However, these models cannot
estimate the relationship with respect to different market phases and fail to address structural
breaks in the data. Markov Regime-switching model provides a flexible framework to model
structural breaks, dynamic shifts and dynamic relationships. Markov-regime switching
methodology is largely used for finding non-linear causality (Fallahi, 2011) and volatility
(Naifar and Dohaiman, 2013), but has not been used to estimate the effect of multiple factors
on oil prices at different regimes. Hence, there is a need to investigate the nonlinear
relationship and comovement between crude oil and its determinants at different volatile
regimes using Markov switching model which will account for structural breaks, nonlinearity
and various regimes.
2.2 Co-movement of oil price with macroeconomic factors
Previous studies that examined the relationship between the crude oil and exchange
rates/stock indices indicated inconsistency in results. Long-run equilibrium exists between
the crude oil price and exchange rate (Oriavwote and Eriemo, 2012). Some argued that
increase in oil prices is associated with the appreciating exchange rate (Basher et al., 2012;
Beckmann and Czudaj, 2013). But other studies argued that increase in oil prices is
associated with the depreciating exchange rate (Wang and Wu, 2012). While bi-directional
causality exists between oil price and exchange rates after crisis (Ding and Vo, 2012), at large
time horizons (Benhmad, 2012) and at higher time scales (Tiwari et al., 2013), Iwayemi and
Fowowe (2011) there is no impact of oil price on exchange rates.
Few studies (Cong et al., 2008; Park and Ratti, 2008) found that, oil price shocks have no
impact on the real stock returns and during crisis oil shocks do not affect stock market phases
(Jammazi and Aloui, 2010). However, Miller and Ratti (2009) found that stock market reacts
negatively to increase in oil price in the long-run. There is also evidence that increase in
emerging market stock prices increases oil prices (Basher et al., 2012), but the impact of oil
price shocks on stock prices for emerging countries is mixed partly in contrast to developed
stock markets. Moreover, the stock returns of large oil producing and consuming countries
have relatively strong dependence with oil price (Sukcharoen et al., 2014) and the
4

dependence between commodity and stock market is time varying and symmetrical (Delatte
and Lopez, 2013).
Traders and institutional investors have varied investment horizons and different risk profiles
and co-movement between oil prices and macroeconomic indicators becomes important to
assess the risk profile of countries and the market movements. While traders would prefer
analysis based on nominal prices, most of the studies have focused on real prices.
Previous literature examines the co-movement using traditional time series models such as
OLS, VAR/ VECM, co-integration and de-trended correlation analysis, which look into the
time scale of the variables. However, co-movement between variables may vary across time
and the effect could change at different time horizons. Very few studies have used wavelet
analysis to capture the co-movement dynamics across time and frequency scales (Tiwari et
al., 2013; Loh, 2013). Moreover, existing studies have examined the relationship between oil
prices and exchange rates/ stock indices for one country/ few countries, which are mostly
developed markets. Very few studies have focussed on the relationship between the oil prices
and emerging stock markets (Basher and Sadorsky, 2006; Hammoudeh and Li, 2005).
Besides, prior studies have not focused on oil importing countries and also analyzed from
traders perspective considering nominal prices. Hence, there is a need to focus on traders and
institutional investors perspective and examine the co-movement between benchmark oil
price with (i) nominal exchange rates and (ii) stock indices of major oil-importing countries
using wavelet coherence approach.
3. OBJECTIVES
The purpose of this study is to examine the factors that determine the crude oil price and the
comovement dynamics with macroeconomic factors. It is important to understand the factors
affecting crude oil price with respect to the changes in the economic cycles and volatile
regimes. It is also pertinent to understand the impact of crude oil price on various
macroeconomic variables, particularly for each oil-importing country. Hence, the specific
objectives of the study are
i.
ii.
iii.

to examine the impact of fundamental, financial, and speculative factors on WTI

crude oil prices at high and low volatile regimes.
to examine the co-movement between oil price and exchange rate across different
time and frequency horizons for oil importing countries.
to examine the co-movement between oil price and Stock Indices across different time
and frequency horizons for oil importing countries.

4. DATA AND METHODOLOGY

4.1 Drivers of crude oil price:
The study focuses on WTI crude oil traded at NYMEX exchange and the fundamental
variables considered in the study are Lagged WTI oil price, OPEC production, OECD Stocks,
OECD consumption, OECD Net Imports, industrial production of China and Industrial
5

production of India. The speculative variable used in the study is net long positions of noncommercial traders. The financial variables include 12 month basis, S&P 500 and tradeweighted US dollar Index (Broad). The sample period spans from April 1995 to May 2014
comprising 229 observations. The monthly data is collected from databases such as Energy
Information Agency, World Bank, St. Louis Federal Reserve (USA) and the US Commodity
Futures Trading Commission.
We examine the stationarity of the variables using Augmented Dickey Fuller, Phillip Perron
and KPSS tests, and examine the non-linearity using BDS test. We use Markov regimeswitching model to examine the impact of (i) Speculation on oil prices; (ii) Speculation on oil
prices controlling for financial variables; and (iii) Speculation on oil prices controlling for
fundamental and financial variables at different regimes. Using the equation given below, we
explain the dynamics of the WTI crude oil spot price using potential determinants from
fundamental, financial and speculation factors.
(1)
where kj is the slope coefficient of the independent variables, which is state-dependent ( st );

kj is the slope coefficient of the dummy variables; ut is the innovation process with variance
v(st) based on the state (st). The slope coefficient of the independent variables and the
variance of the error term is state dependent (st). However, the intercept and dummy variables
are not state dependent. The analysis has been done using Matlab-R2014a.
4.2 Co-movement between crude oil and macro-economic factors:
The daily time series data of various benchmark crude oil prices such as the WTI, Brent and
OPEC basket crude oil spot price are used. The OPEC basket crude is used for Asian
countries; Brent oil price is used for Europe and WTI oil price is used for the US. We identify
top fifteen oil importing countries based on the EIA crude oil import statistics. The data
comprises stock indices of oil-importing countries such as the US (SPX), China (SSE50),
Japan (NKY), India (NIFTY), South Korea (KOSPI), Germany (DAX), France (CAC), Spain
(IBEX), Singapore (FSSTI), Italy (FTSE MIB), Netherlands (AEX), Taiwan (TWSE), Turkey
(XU100), Indonesia (LQ45) and Belgium (BEL20) and the exchange rate of oil-importing
countries such as China (USDCNY), Japan (USDJPY), India (USDINR), South Korea
(USDKRW), Germany (USDEUR), France (USDEUR), Spain (USDEUR), Singapore
(USDSGD), Italy (USDEUR), Netherlands (USDEUR), Taiwan (USDTWD), Turkey
(USDTRY), Indonesia (USDIDR) and Belgium (USDEUR) are used for the study. Daily data
for the period starting from 6th January 2003 to 30th December 2014 (3012 observations) has
been considered, except for the Stock index of China (SSE50) which starts from 5th January
2004 to 30th December 2014 (2765 observations). The data is collected from Bloomberg
database.
The study uses continuous wavelet transform to examine the co-movement of oil price with
(i) nominal exchange rates and (ii) stock indices of major oil-importing countries. The
wavelet coherence is seen as a localized correlation coefficient in the time frequency space
6

and the relationship is found through the frequency bands and time intervals. A wavelet
transform provides a three-dimensional diagram that illustrates time series information at
different frequencies, time and strength. The frequency could range from low to high; the
time could range from short term to long term and finally, the strength of association is
measured by color coding. In this study, we follow Grinsted et al. (2004) framework of
Wavelet Transform Coherence (WTC). Initially, we use Continuous Wavelet Transform
(CWT) to remove noise in the series and then we use WTC to set the pattern of comovement.
5. RESULTS AND FINDINGS
5.1 Determinants of WTI Oil Prices
The analysis using Markov Switching model at high and low volatile regime shows that
speculative factors have the insignificant role at high-volatile regime but is significant at lowvolatile regime when controlled for financial and fundamental factors (see Table 1). Dollar
index, Lagged WTI oil price, OECD stock, Industrial production of India, and S&P 500 plays
a significant role in predicting the changes in crude oil price regardless of the state. The
impact of basis, OECD net imports, Industrial production of China, and OECD consumption
on the crude oil is significant in bullish and bearish market periods but it has insignificant
impact in normal market phases. The results indicate that speculation has active role when
combined with financial and fundamental factors in high-volatile regime.
Table 1 Effect of speculative, fundamental and financial variables on WTI oil price
MODEL 1
Determinants

State 1

MODEL 2

State 2

State 1

MODEL 3
State 1

State 2

Lagged WTI spot oil price

State 2

0.2050*

-0.1286*

OPEC Production

0.6273**

0.6723*

OECD Stocks

- 2.8084*

8.6105*

OECD Consumption

-0.1244

1.9411*

OECD Net Imports

-0.1984

-1.0853*

Industrial Production INDIA

0.2164*

-1.3195*

Industrial Production CHINA

-0.1084

-0.2137*

S&P 500

1.353912*

-0.168533

0.4047*

-0.5342*

Dollar Index

-2.36167*

0.609047

-0.9107**

2.3189*

12 Month Basis

0.012282

-0.002821

-0.0076

-0.0193*

Non Commercial Net Long Positions

0.007961

-0.279252***

-0.041312*

0.030444*

-0.0017

0.0118*

Intercept

0.01242*

-0.246028*

-0.017704

0.014666*

-0.0026

-0.0186*

Low

High

Low

High

High

Low

0.005303*

0.005438

0.002333*

0.004916*

0.004089**

0.000005*

Expected duration of Regime

Transition Probabilities Matrix

175.47

5.2

1.28

5.02

16.68

1.61

(std. error, p-value)

Transition Probabilities Matrix

0.9954
0.0046

0
1

0
1

0.1235
0.8765

0.94
0.06

0.62
0.38

States
Model variance

(std. error, p-value)

Note: *** 10% significance; ** 5% significance; * 1% significance
The Table shows results of Markov Regime Switching Model for monthly log returns under two regimes low and high.
Model 1: examines the effect of speculation on WTI oil price; Model 2: examines the effect of speculation on WTI oil
price controlling for financial factors; Model 3: examines the effect of speculation on WTI oil price controlling for
fundamental and financial factors.
WTI oil price is valued / priced in US $. OPEC production, OECD net imports and OECD consumption are measured
as thousand barrels per day, whereas OECD inventory is measured as million barrels per month. Industrial production of
China and India are measured as value in US $. Trade weighted US Dollar Index (Broad): A weighted average of the
foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners. Broad
currency index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong
Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia,
Sweden,
Argentina,
Venezuela,
Chile
and
Colombia.
12 Month Basis: Difference between spot price and 12 month ahead futures price (i.e.) S t Ft+12. S&P 500: A free float
market capitalization-weighted index, also called a market-value-weighted index is a index whose components
are weighted according to total market value of their outstanding shares. Net Long Positions (Non-Commercial) - Oil
(Futures & Options): Difference between total long positions minus short positions in both futures and options. NonCommercial Traders: Traders who do not involve directly in production, distribution or management of the underlying
commodities.

5.2 Co-movement of Crude Oil with Stock Index and Exchange Rate of Oil Importing
Countries
a) Oil price and Exchange rate:
Correlation between the stock indices and oil price is high during crisis for all the exchange
rates. A low coherency is observed between the oil price and exchange rate of China
(USDCNY). It is also found that during crisis USDCNY is leading the oil price. Relationship
between the oil price and eurozone exchange rate (USDEUR) was consistent throughout the
high and medium term. In other periods, USDEUR is lagging the oil price. Correlation
between the oil price and exchange rate of Indonesia (USDIDR) is high during financial
crisis. USDIDR is leading the oil price in long term.
Correlation between oil price and exchange rate of India (USDINR) is having high coherence
during financial crisis in both medium and long term. USDINR is lagging in long term,
whereas it is leading the oil price in medium term. A high coherency is witnessed between oil
price and Japanese exchange rate against US Dollar (USDJPY) during crisis (see figure 1.1).
During the same period, USDJPY is leading the oil price. Singapore exchange rate
(USDSGD) is highly correlated with oil price during crisis. USDSGD is leading the oil price
in the both medium and long term. Other exchange rates that have higher coherence during
all the times include USDKRW, USDTRY, and exchange rate of Taiwan USDTWD.
USDKRW is it is leading the oil price in medium term, whereas lagging the oil price in the
long term (see figure 1.2). USDTRY is leading the oil price in both medium and long term
and USDTWD is lagging the oil price in all the three terms.
FIGURE1.1: OPEC OILVs. USDJPY

FIGURE 1.2: OPEC OIL Vs. USDKRW

Note: Figure 1.1 & 1.2 presents the wavelet coherency plot between oil price and Exchange rate. Wavelet-squared
coherencies are indicated by contour, the 5% significance level is denoted by a dashed black line contour and the area
outside this line is the boundary affected zone. The area affected by edge effects are denoted by the cone of influence and the
area outside the cone of influence has no statistical significance. The color code for coherency ranges from blue (close to
zero) to red (close to one), where blue refers to low coherency and red refers to high coherency.

b) Oil price and Stock Indices:

Correlation between the stock indices and oil price is high during crisis in short, medium and
long term for the US stock market index (S&P 500) (see figure 2.1), Indian stock market
index (NIFTY), Korean stock market index (KOSPI), German stock market index (DAX 30),
French stock market index (CAC), Singapore stock market index (FSSTI), and Belgium stock
market index (BEL 20). High coherency is witnessed between stock indices and oil prices in
the long and medium term for Chinese stock market index (SSE 50) (see figure 2.2),
Netherland stock market index (AEX), and Indonesian stock market index (LQ 45). The other
countries indices correlation with oil price is high during crisis only in long term. Those stock
markets include Japan Stock market Index (Nikkei 225), Spain stock market index (IBEX),
Italian stock market index (FTSEMIB), Taiwan stock market index (TWSE), and Turkey
stock market index (XU 100). During crisis, oil price is leading KOSPI, DAX, NIFTY, CAC,
IBEX, FSSTI, FTSEMIB, AEX, TWSE, XU 100, BEL 20, LQ 45, and Nikkei 225 in the long
term and NIFTY is leading the oil price in the medium term. It is also observed that in the
long term S&P 500 is leading the oil price.
FIGURE 2.1: WTI OILVs. SPX

FIGURE 2.2: OPEC OIL Vs. SSE50

Note: Figure 2.1 & 2.2 exhibits the wavelet coherency plot for different benchmark crude oil price and stock indices of oil
importing countries. Monte Carlo simulations are used to obtain values for the significance. Wavelet-squared coherencies
are indicated by contour, the 5% significance level is denoted by a dashed black line contour and the area outside this line is
the boundary affected zone. The area affected by edge effects are denoted by the cone of influence and the area outside the
cone of influence has no statistical significance. The color code for coherency ranges from blue (close to zero) to red (close
to one), where blue refers to low coherency and red refers to high coherency.

6.

CONCLUSION
The study examines the determinants of crude oil and their impact on the WTI oil price.
Markov-regime switching methodology was used to analyze the significance of various
factors in the presence of high- and low-volatile regimes. Our empirical findings indicate that
speculation affects the oil price positively in low-volatile state and has inverse effect in highvolatile state. At low-volatile regimes, fundamental, financial and speculative factors have
significant impact on the oil price, whereas at high volatile regimes, only the factors
pertaining to supply, S&P 500 and trade-weighted US dollar (Broad) Index have a significant
effect on the oil price. Broadly, the results imply that the effect of speculation on oil price can
only be seen in low-volatile regimes, whereas, in high-volatile regimes, supply and financial
factors play a significant role in explaining the oil price. Our results suggest that regulators
and policymakers should consider supply dynamics while tracking or predicting the
movements of the oil price, particularly, during high-volatile periods.
Wavelet Coherence analysis indicates a high coherence between oil price and macroeconomic
indicators across all the countries during the financial crisis. The nominal exchange rates tend
to have negative relationship with benchmark oil prices except in the case of exchange rate of
Japan in the long run and exchange rate of South Korea in the medium run. Stock indices
tend to have positive relationship with benchmark oil prices in both long and medium run.
S&P is leading the oil price, whereas SSE50, Nikkei 225, NIFTY, KOPSI, DAX, CAC,
IBEX, FTSSI, FTSEMIB, AEX, TWSE, XU 100, LQ45 and BEL 20 are lagging the oil price
in the long run. In the medium term, except for NIFTY, oil price is leading the stock market
index. Overall, the results indicate that the oil price and stock indices of major oil-importing
countries are correlated in long and medium term, but not in short term. The leadlag
relationship between oil price and macroeconomic indicators are observed to change across
frequency and time. While exchange rate offers diversification benefits, stock market indices
10

provide no diversification avenues since the pattern of co-movement of stock market indices
and oil prices are similar across all oil importing countries.
7. CONTRIBUTIONS OF THE STUDY
Our study contributes to the oil price determinants literature in the following ways:
a. We contribute by examining the impact of speculative activity in derivative
segment on WTI crude oil prices, controlling for fundamental factors and
financial factors.
b. We contribute by considering individual demand factors such as OECD
consumption, OECD net import and supply factors such as OPEC production,
OECD inventory and also account for increasing demand from emerging
economies.
c. We contribute methodologically by using Markov Regime Switching
methodology to control for structural break and non-linearity. We also develop
a multivariate framework to examine the impact of fundamental, financial and
speculative factors on oil prices at high and low volatility regime.
With respect to comovement dynamics of oil prices with macro factors:
d. Existing literature focused more on real prices (Tiwari et al., 2013; Benhmad,
2012). We use nominal prices of oil instead of real prices, and thereby enable
investors to shift their positions quickly in stock and forex market to mitigate
the risk arising from volatility in oil prices.
e. While previous studies have focused only WTI crude, different crude oil
benchmarks such as WTI, Brent and OPEC have been used to examine the
comovement dynamics. The OPEC basket crude is used for Asian countries;
Brent oil price is used for Europe and WTI oil price is used for the US.
f. Previous literature extensively focuses on time series methodologies to
measure co-movement, but we study the relationship between the crude oil
and macroeconomic indicators both at time and frequency domain using
wavelet coherence technique.
8. IMPLICATIONS OF THE STUDY
Policymakers, regulators and investors can incorporate speculative factors while predicting
oil price movement during volatile period, since the speculative factors are found to have
significant impact on crude oil price, alongwith financial and fundamental factors in highvolatile regimes. The long-term correlation between the oil price and macro-economic factors
implies that oil price can be determined using the lag of exchange rate and stock index can be
estimated using the oil price lags. The results have implications for individual traders and
institutional investors while designing their portfolio for short, medium and long term time
horizons.
11

9. LIMITATIONS
(1) Various determinants of oil prices were incorporated into the model to see how
speculative variables behave with respect to other determinants such as fundamental
and financial factors. While political factors such as type of Government (democracy,
monarchy etc) and type of economy (open economy, closed economy etc) may
play a key role in determination of the oil prices, we discontinued these factors due to
nonavailability of data and ambiguity in measurement.
(2) The short-run relationships in wavelet coherence analysis were not captured due to
high frequency daily data. But using weekly or monthly data could better visualize the
short-run movements or relationship between variables. Moreover, the co-movement
analyses was limited to only two macrofactors such as exchange rate and stock index
and other factors were not considered.
10. SCOPE FOR FUTURE RESEARCH
i.
ii.

Asymmetric effect of crude oil on macroeconomic variables could provide a better

understanding on the correlation between the oil price and macroeconomic variables.
Co-movement of oil prices is observed only for the stock indices and exchange rate.
The correlation with other macroeconomic variables such as interest rate and inflation
with the oil price might provide more insight on fluctuations in the crude oil prices.

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PUBLICATIONS
Journal:
Thenmozhi, M., and Srinivasan, N., 2015, Co-movement of oil price, exchange rate and
stock index of major oil importing countries: a wavelet coherence approach, Journal of
Developing Areas, Accepted, December 2015.
Thenmozhi, M., and Srinivasan, N., Determinants of Oil Price: A Markov Regime
Switching Approach, Resources Policy, February 2016. (Under review)
Conference:
Thenmozhi, M., and Srinivasan, N., Determinants of Oil Price: A Markov Regime
Switching Approach, DoMS Research Symposium, Indian Institute Of Technology Madras,
Chennai, India. January 16-17, 2015.
Thenmozhi, M., and Srinivasan, N., Co-movement of oil price, exchange rate and stock
index of major oil importing countries: a wavelet coherence approach, Asia-Pacific
Conference on Business and Social Sciences 2015, Kuala Lumpur, Malaysia. November 2324, 2015.
PROPOSED CONTENTS OF THE THESIS
14

CHAPTER 1 INTRODUCTION
1.1 Major oil price shocks
1.2 Determinants of crude oil
1.3 Inter-relationship between crude oil and macro economy
1.4 Need for the study
1.5 Objectives of study
1.6 Hypothesis
1.7 Data and sample
1.8 Measurement of variables
1.9 Methodology
1.10 Outline of the thesis
CHAPTER 2 DETERMINANTS OF OIL PRICE: A MARKOV REGIME
SWITCHING APPROACH
2.1 Importance of oil price determinants
2.2 Literature on factors influencing oil price
2.3 Framework of the study
2.4 Data and sample
2.5 Methodology
2.6 Determinants of WTI oil price
2.6.1 Test for non-linearity
2.6.2 Effect of speculation on oil price
2.6.3 Effect of speculation on oil price controlling for financial factors
2.6.4 Relative importance of determinants of oil price
CHAPTER 3 WAVELET DYNAMICS OF OIL PRICE, EXCHANGE RATE AND
STOCK INDEX
3.1 Introduction
3.2 Literature review
3.3 Conceptual framework
3.4 Data and sample
3.5 Methodology
3.5.1 Continous wavelet transform
3.5.2 Wavelet coherence (WTC)
3.6 Wavelet dynamics of oil price and exchange rate
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3.7 Wavelet dynamics of oil price and stock index

CHAPTER 4 CONCLUSION
4.1 Findings of the study
4.2.Contributions of the study
4.3.Implications of the study
4.4. Limitations of the study
4.5 Scope for future work

16