Volatility spillovers between WTI and Brent spot crude oil prices: an analysis of granger causality in variance patterns over time

• Published in: Research in international business and finance 2021-04, Vol.56, p.101385, Article 101385
• Main Authors: Atukeren, Erdal, Çevik, Emrah İsmail, Korkmaz, Turhan
• Format: Article
• Language: English
• Subjects: Energy economics; Granger-causality; Oil prices; Volatility spillovers
• ISSN: 0275-5319; 1878-3384
• DOI: 10.1016/j.ribaf.2021.101385

•We investigate the causality patterns in volatility spillovers between WTI and Brent crude oil prices.•We allow for structural breaks in the series and employ rolling Granger-causality-in-variance tests.•We find that the nature and the direction of Granger-causality patterns between WTI and Brent prices changed over time.•WTI daily price volatility are found to Granger-cause Brent daily price volatility between 2015 and 2019.•Under the uncertainty surrounding the COVID-19 environment, a causal feedback relationship in volatility reappears in 2020. There has been an increase in price volatility in oil prices during and since the global financial crisis (GFC). This study investigates the Granger causality patterns in volatility spillovers between West Texas International (WTI) and Brent crude oil spot prices using daily data. We use Hafner and Herwartz’s (2006) test and employ a rolling sample approach to investigate the changes in the dynamics of volatility spillovers between WTI and Brent oil prices over time. Volatility spillovers from Brent to WTI prices are found to be more pronounced at the beginning of the analysis period, around the GFC, and more recently in 2020. Between 2015 and 2019, the direction of volatility spillovers runs unidirectionally from WTI to Brent oil prices. In 2020, however, a Granger-causal feedback relation between the volatility of WTI and Brent crude oil prices is again detected. This is due to the uncertainty surrounding how the COVID-19 pandemic will evolve and how long the economies and financial markets will be affected. In this uncertain environment, commodities markets participants could be reacting to prices and volatility signals on both WTI and Brent, leading to the detection of a feedback relation.