Oko oa o , Ugochi C.; Lei ik, Thomas
A icle
Dynamic link be ween liquidi y and e u n in he c ude oil
ma ke
Cogen Economics & Finance
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Dynamic link be ween liquidi y and e u n in he
c ude oil ma ke
Ugochi C. Oko oa o & Thomas Lei ik
To ci e his a icle: Ugochi C. Oko oa o & Thomas Lei ik (2024) Dynamic link be ween
liquidi y and e u n in he c ude oil ma ke , Cogen Economics & Finance, 12:1, 2302636, DOI:
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FINANCIAL ECONOMICS | RESEARCH ARTICLE
Dynamic link be ween liquidi y and e u n in he c ude oil ma ke
Ugochi C. Oko oa o and Thomas Lei ik
No d Uni e si y Business School, Bodø, No way
ABSTRACT
In his s udy, we in es iga e he dynamic ela ionship be ween e u n and liquidi y in
he B en and he Wes Texas In e media e (WTI) oil ma ke s. The esea ch u ilises
daily oil p ice and olume da a and mon hly mac oeconomic da a om Janua y 1,
1996 o Ap il 28, 2023 ob ained om he Ene gy In o ma ion Associa ion (EIA), he
O ganisa ion o Economic Co-ope a ion and De elopmen (OECD), he Fede al
Rese e Economic Da a (FRED), in es ing.com, and he In e na ional Mone a y Fund
(IMF). We employ he ARMAX(1,1)-aDCC-GARCH- (1,1) model o cap u e ime- a ying
associa ions be ween e u n and liquidi y. Ou indings e eal a signi ican impac o
specula ion on he e u n-liquidi y ela ionship, which is mo e pe sis en in he WTI
ma ke . Fu he mo e, we obse e a pa e n be ween he B en and WTI ma ke s du -
ing he s udy pe iod, which he he e ogeneous ade hypo hesis can explain. These
insigh s hold implica ions o policymake s aiming o enhance he c ude oil ma ke ’s
s abili y, as well as o ma ke ade s in de eloping ading and isk managemen
s a egies.
ARTICLE HISTORY
Recei ed 15 May 2023
Re ised 31 July 2023
Accep ed 3 Janua y 2024
KEYWORDS
C ude oil; ma ke liquidi y;
specula ion; commodi ies
REVIEWING EDITOR
Da id McMillan, Uni e si y
o S i ling, Uni ed Kingdom
SUBJECTS
Economics; Finance;
Business, Managemen and
Accoun ing
JEL CLASSIFICATION
g14; g15; q02; q41
1. In oduc ion
In his a icle, we in es iga e he dynamic ela ionship be ween p ice luc ua ions and liquidi y in he
B en and WTI oil ma ke s. We aim o unde s and he ac o s ha d i e his ela ionship and hei in e -
ac ions o e ime. Ou esea ch o e s aluable insigh s in o ene gy ma ke dynamics, pa icula ly he
ole o specula ion and ade he e ogenei y in shaping he e u n-liquidi y ela ionship. This unde s and-
ing con ibu es o de eloping mo e e icien ene gy planning, managemen , and in eg a ed ene gy sys-
ems by in o ming decision-make s abou he ac o s a ec ing oil ma ke s abili y.
Nume ous s udies ha e ocused on liquidi y and i s associa ion wi h p ice and o he aspec s o he
s ock ma ke (e.g. Amihud & Mendelson, 1986; Cho dia e al., 2000,2008; Hameed e al., 2010; Lo & Hall,
2015; Lei ik, 2022). Resea ch on liquidi y in he c ude oil ma ke emains limi ed, wi h only a ew s ud-
ies examining his mic os uc u e ea u e in he commodi y ma ke (e.g. Haugom & Ray, 2017; Ma shall
e al., 2012; Ma shall e al., 2013; Smales, 2019; Zhang e al., 2019). Fu he mo e, he e is a lack o
esea ch explo ing he dynamic ela ionship be ween liquidi y and e u ns in he c ude oil ma ke .
Consequen ly, he ac o s con ibu ing o he ela ionship be ween p ice and liquidi y in he oil ma ke
emain unce ain. In his pape , we compu e he liquidi y o B en and WTI oil p ices and analyze hei
ela ionship wi h e u ns in he oil ma ke .
The impo ance o examining he in e ac ion be ween ma ke liquidi y and e u n in he commodi y
ma ke s ems om he i al oles hese mic os uc u e ea u es play in bo h he inancial ma ke and he
global economy. As iden i ied by Hamil on (2003), commodi y p ice mo emen s se e as indica o s o
CONTACT Ugochi C. Oko oa o [email p o ec ed] No d Uni e si y Business School, Uni e si e sall
een 11, Bodø, 8026,
No way.
#
P esend add ess: UiT, The A c ic Uni e si y o No way, T omsø, No way
ß2024 No d Uni e si y. Published by In o ma UK Limi ed, ading as Taylo & F ancis G oup.
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion License (h p://c ea i ecommons.o g/licenses/by/4.0/), which
pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly ci ed. The e ms on which his a icle has been
published allow he pos ing o he Accep ed Manusc ip in a eposi o y by he au ho (s) o wi h hei consen .
COGENT ECONOMICS & FINANCE
2024, VOL. 12, NO. 1, 2302636
h ps://doi.o g/10.1080/23322039.2024.2302636
shi s in he mac oeconomy and a e signi ican ac o s in p eemp i e mone a y policy o mula ion.
Ma ke liquidi y is c ucial when e alua ing he quali y o a inancial ma ke , and he iming o illiquidi y
is a conce n o a ious s akeholde s due o i s impac on ading cos s and he p o i abili y o ading
s a egies. In es o s di e si ying hei equi y po olios wi h oil commodi y asse s mus conside he
nega i e e ec s o ading cos s when e-balancing hei po olios. Fo oil companies and o he ade s
wi h physical s akes in he c ude oil ma ke , ading cos s a e essen ial when assessing he bene i s o
hedging a physical posi ion in he commodi y ma ke . The p ice-liquidi y ela ionship is i al o de e -
mining isk managemen and ading s a egies, iming ade o de execu ion, and e alua ing he e ec -
i eness o echnical indica o s (see Amihud & Mendelson, 1986; Cho dia e al., 2000; Hube man & S anzl,
2005; Kyle, 1985). Consequen ly, his s udy explo es he dynamic ela ionship be ween p ice and liquidi y
in he c ude oil ma ke while con olling o changes in ma ke undamen als. We in es iga e no only
he exis ence o a ela ionship be ween liquidi y and oil p ice bu also how his ela ionship has e ol ed
o e he s udy pe iod. We pay close a en ion o pe iods o signi ican luc ua ion in his ela ionship o
gain insigh s in o he po en ial d i e s o hese changes.
This empi ical pape ills he cu en gap in he s udy o commodi y ma ke liquidi y. In addi ion, he
design o his s udy highligh s he e olu ion o he ela ionship be ween e u n and liquidi y, which has
no been p e iously s udied in any ma ke . This s udy’s indings no only enhance ou knowledge o he
c ude oil ma ke ’s mic os uc u e bu also p o ide c i ical insigh s o policymake s, ma ke ade s, and
esea che s, os e ing in o med decision-making in he ene gy sec o and p omo ing a mo e esilien
and e icien global ene gy landscape.
The es o his pape is s uc u ed as ollows: Sec ion wo (2) con inues he discussion on he ex an
li e a u e on his opic, Sec ion h ee (3) desc ibes he esea ch da a and me hodology, sec ion ou (4)
p esen s and discusses he empi ical esul s, and sec ion i e (5) concludes.
2. Li e a u e e iew
E en hough he ela ionship be ween ma ke liquidi y and p ice mo emen s in inancial ma ke s has
been ho oughly in es iga ed, he e is no consensus on how liquidi y a ec s he e u ns o di e en
ypes o asse s. Fo example, he seminal esea ch o Amihud and Mendelson (1986) ind ha be ween
wo o he wise equal asse s in e ms o cash lows, he less liquid asse has a highe expec ed e u n o
wo asse s. This sugges s ha liquidi y is p iced in equi y s ocks. Chen e al. (2007), Lin e al. (2011), and
Fon aine and Ga cia (2012) ind ha liquidi y isk is p iced in co po a e bonds and yield sp eads. In he
equi y op ions ma ke , Ch is o e sen e al. (2018) ind e idence ha ade s a e compensa ed o he
isks associa ed wi h holding isky illiquid equi y op ions.
While Cakici and Za emba (2021) and F ench and Tabo da (2018) ind a nega i e ela ionship be ween
e u n and illiquidi y, sugges ing he absence o an illiquidi y p emium, Ben-Rephael e al. (2015) disco -
e s ha s ock liquidi y has signi ican ly imp o ed in ecen decades, leading o a dec eased liquidi y p e-
mium ha is no longe signi ican ly di e en om ze o. In con as , Lei ik (2022) inds no ela ionship
be ween liquidi y a ia ion and e u ns in he c yp ocu ency ma ke . Szymanowska e al. (2014) and
Ba en e al. (2019) epo ha oil liquidi y is p iced, bu Lei ik e al. (2017) a gues ha his liquidi y
p emium does no ex end o he agg ega e s ock ma ke . E en in a small ma ke domina ed by ene gy,
he e is no ela ionship be ween ma ke liquidi y and s ock e u ns, implying ha ime- a ying liquidi y
in oil p ices does no ansla e in o e u ns o companies elian on oil as hei main sou ce o p o i abil-
i y. In ligh o hese con adic o y indings, his pape aims o in es iga e he dynamic ela ionship
be ween liquidi y and e u ns in he c ude oil ma ke .
Nume ous models and hypo heses a emp o explain he ela ionship be ween p ice and liquidi y, as
well as he easons o a ia ions in his ela ionship ac oss inancial ma ke s o e ime. In hese models,
liquidi y is a p oxy o o he unobse ed ma ke ai s, such as ade he e ogenei y, in o ma ion asym-
me y, and ma ke sen imen , which in luence p ice and liquidi y beyond he ma ke ’s undamen als.
Wang (1994) p oposes ade he e ogenei y as a ai ep esen ed by ma ke liquidi y, explaining p ice-
liquidi y dynamics in he equi y ma ke . As ma ke ade s di e in hei in o ma ion se s, capi al
cons ain s, isk appe i es, and he esul ing ading s a egies hey adop , ma ke dynamics change
depending on he p edominan ype o ade a any gi en ime.
2 U. C. OKOROAFOR AND T. LEIRVIK
Beha iou al asse p icing heo y and he impac o he e ogeneous ade s on a ma ke ’s mic os uc-
u e ha e gained popula i y in he li e a u e. Fo example, Bake and S ein (2004) demons a es
how ma ke membe s’sen imen abou expec ed e u ns a ec s liquidi y and, consequen ly, he p ice-li-
quidi y ela ionship in he equi y ma ke . Liu e al. (2023) e eals he exis ence o a signi ican liquidi y
p emium in he Chinese s ock ma ke , a ibu able o i m-speci ic news sen imen . In addi ion o e u n
p edic abili y, Beschwi z e al. (2020) shows ha ma ke sen imen impac s liquidi y and ading beha -
io s. Se e al o he s udies highligh how he beha io o he e ogeneous in es o s may sus ain inco ec
p ices and in luence demand o inancial ins umen s a di e en poin s (see, o example, Chau e al.,
2016; Lee e al., 2020; Schneide , 2022; Zheng e al., 2018).
Conce ning he e ogenei y in ading s a egies, empi ical indings sugges ha he ela ionship
be ween p ice and liquidi y is in luenced by he ading s a egies adop ed by di e en ma ke ade s.
Fo ins ance, DE Long e al. (1990) posi s ha when noise ade s use a posi i e eedback s a egy—buy-
ing when he ma ke p ice ises and selling when i alls— hey c ea e posi i e causali y om p ice o
ma ke liquidi y. When employing a specula i e ading s a egy, o he ade s ac as con a ians in he
ma ke , ading agains ecen p ice mo emen s. This esul s in di e en dynamics be ween ac ual p ice
mo emen s and liquidi y changes, wi h an inc ease in ma ke liquidi y being associa ed wi h ad e se
p ice mo emen s (Bloom ield e al., 2009; Lee e al., 2020). Pe ei a and Zhang (2010) and Ba en and Vo
(2014) sugges ha he ac i i ies o ade s who adap hei ades o ma ke liquidi y condi ions o p i-
o i ize di e si ica ion in luence he dynamics o p ice and liquidi y in he equi y ma ke .
Ex ending he indings om hese s udies o he oil ma ke sugges s ha he e ogenei y and ma ke sen-
imen , which canno be di ec ly obse ed, may be in e ed by he p ice- olume ela ionship and how i
changes o e ime. Empi ical s udies on p ice and liquidi y in he oil commodi y ma ke suppo some o
he a o emen ioned hypo heses o a ying deg ees. Fo ins ance, Moosa and Sil apulle (2000) ind e i-
dence suppo ing he noise ading model in he ela ionship be ween p ice mo emen s and olume in
he WTI ma ke . Mane a e al. (2016) ind ha specula ion o non- inancial ade s a ec s p ice ola ili y in
he ene gy ma ke s, al hough i s impac on he p ice-liquidi y ela ionship is no analysed. Haugom and
Ray (2017) inds e idence o he he e ogeneous ade hypo hesis and i s impac on he ela ionship
be ween he numbe o ades and e u n dis ibu ion in he commodi y ma ke . Al ano e al. (2020) ind
ha specula i e noise ade s con ibu e o he ola ili y in oil p ices by o e eac ing o language sen imen
in he news abou oil ma ke undamen als. Du ing pe iods o high ola ili y, Liu e al. (2021) ind ha
i a ional ading beha iou con ibu es mo e o illiquidi y in he Chinese commodi y u u es ma ke han
he ac i i ies o undamen al/ a ional ade s. Kang e al. (2020) inds e idence o liquidi y p emia in he
commodi y ma ke , which di e s based on he ading s a egies adop ed by he di e en ypes o ade s
wi hin he ma ke . In gene al, ew s udies ha e examined he ela ionship be ween p ice and liquidi y in
he commodi y ma ke compa ed o o he inancial ma ke s. The ew ha exis ha e ocused on ading
olume as a measu e o liquidi y, and he me hod o analysis applied does no cap u e he ime- a ian
na u e o his ela ionship. Al hough olume is an in eg al aspec o ma ke liquidi y, Jones e al. (1994);
Cho dia e al. (2000) sugges ha i becomes less in o ma i e when sepa a ed om ading equency and
does no accoun o ansac ion cos s and p ice impac s o ading. In his s udy, we examine he p ice-
liquidi y dynamics in he c ude oil ma ke , ocusing on he p ice impac o illiquidi y. Fu he mo e, we cap-
u e any sho and long- un e ec s o signi ican shocks o he c ude oil ma ke . Con olling o oil ma ke
undamen als, we examine he changes in his ela ionship o e ime and es o wha ex en he a o emen-
ioned hypo heses explain he a ia ions in he p ice-liquidi y ela ionship.
Due o he s ong link be ween in la ion, he mac o economy and he commodi y ma ke iden i ied
in seminal s udies, mac oeconomic ac o s a e i al conside a ions when a emp ing o unde s and he
na u e o he commodi y ma ke s in gene al, and he p ice-liquidi y dynamics o he commodi y ma ke
in pa icula . Mac oeconomic ac o s such as exchange a e luc ua ions, in e es a es, GDP g ow h, o -
eign di ec in es men , and o he mone a y policy announcemen s ha e also been iden i ied as signi i-
can in luences on demand and supply condi ions wi hin he economies and he oil ma ke , see, o
example, B owne and C onin (2010), and Du gu i e al. (2021). Fu he mo e, Ak am (2009) ind ha com-
modi y p ices inc ease in esponse o he dolla ’s dep ecia ion. Ra i and Vespignani (2013) show ha
inc eases in he M2 money supply o BRIC coun ies accoun ed o an inc ease in eal oil p ices owing o
i s posi i e impac on liquidi y om he demand side. Mo eo e , Kilian (2009) p o ides a s uc u al
COGENT ECONOMICS & FINANCE 3
decomposi ion o oil p ice shocks in o he agg ega e oil demand and oil supply, wi h he esiduals
being accoun ed o by p ecau iona y demand shocks. In his s udy, we model he impac o specula i e
non-ma ke undamen als on he p ice-liquidi y ela ionship by con olling o he mac oeconomic a ia-
bles which a ec he undamen als o he c ude oil ma ke . We hypo hesise ha he e is a signi ican
esidual impac on p ice and liquidi y a e con olling o hese mac oeconomic undamen als, which is
accoun ed o by he impac o specula i e/non- undamen al ac o s.
3. Da a and me hodology
3.1. Da a
3.1.1. C ude oil e u n
In his s udy, we u ilise daily p ice and olume da a om B en and Wes Texas In e media e (WTI) nea -
mon h u u es con ac s as p oxies o he c ude spo ma ke , om Janua y 1, 1996, o Ap il 28, 2023.
The da a se ange is su icien ly la ge enough o cap u e ecen and ele an e en s in he c ude ma -
ke , such as he global inancial c isis o 2008–09, he 2014 oil glu , he a e ma h o he global shu -
down due o he Co id-19 pandemic, and he global u moil due o he Russian wa in Uk aine du ing
2022–23. Missing alues o seemingly e oneous obse a ions a e checked manually. Fo example, some
days a e egis e ed wi h Open, High, Low, and Close p ices equi alen o he p e ious day’s closing
alue combined wi h ze o olume. We assume his is an e oneous obse a ion, and we ha e dele ed 12
obse a ions we e his was he case. Fo days wi h changes in p ices, as well as p ices being di e en
han he day be o e, bu no olume egis e ed, we used he p e ious wo day’s a e age olume. This
was he case o 115 obse a ions. We end up wi h 6975 obse a ions o WTI. Using he same me hod-
ology o B en , we end up wi h 7001 daily obse a ions.
We ob ained da a o he WTI and B en C ude Oil Financial u u es con ac , p ima ily aded a
he New Yo k Me can ile Exchange (NYMEX) om in es ing.com, and quali y checked he da a
agains obse a ions e ie ed om he Fede al Rese e Economic Da a (FRED). Howe e , he FRED
da a only ha e p ices o WTI and B en , and no olume aded. Ne e heless, he p ices ob ained
om in es ing.com we e iden ical o he FRED obse a ions. The obse a ions o he olume a i-
able had a ew missing alues o WTI. The WTI p ice is o a con ac o 1000 US ba els, o
42000 US gallons, o WTI c ude oil. The minimum ick size o he con ac is $0.01 pe ba el ($10
o con ac ), and he con ac p ice is quo ed in US dolla s. The B en con ac is cash-se led based
on he ICE B en c ude oil Index p ice. In con as , WTI con ac s a e physically se led, linking hei
u u e p ices closely o spo p ices. Bo h con ac s a e sold a 1000 ba els pe uni and ha e hei
con ac p ices quo ed in USD. P ices om bo h c ude oil ma ke s se e as benchma ks o p icing
o he c ude p oduc s globally, making hem sui able p oxies o he c ude oil ma ke . Daily c ude oil
p ice da a is agg ega ed o mon hly equency o ma ch he equency o he mac oeconomic a ia-
bles used as con ol a iables in his s udy. The ela i e mon hly change in he oil p ice is com-
pu ed using log- e u ns, scaled by 100 o ep esen pe cen ages:
Ri ¼ln Pi
Pi −1
100
i¼b en ,w i
(1)
3.1.2. C ude oil liquidi y
The le el o illiquidi y wi hin he commodi y ma ke is measu ed by he p ice-impac measu e (ILLIQ)
o Amihud (2002). Amihud’sILLIQ is p e e ed o e ading olume in his s udy as Jones e al.
(1994) sugges ha ade olume may become less in o ma i e abou liquidi y a ia ion once sepa-
a ed om ading equency. Fu he , Ma shall e al. (2012) iden i y ha Amihud’s measu e p o ides
he mos accu a e ep esen a ion o ansac ion cos s when examining liquidi y in commodi y ma -
ke s. Howe e , his p ice-based liquidi y p oxy is limi ed by i s endency o unde es ima e he ac ual
p ice impac wi hin he commodi y ma ke , as iden i ied in Ma shall e al. (2012). The mon hly ILLIQ
es ima e is gi en as:
4 U. C. OKOROAFOR AND T. LEIRVIK
ILLIQiT ¼1
TX
T
¼1
jR j
DVol
(2)
whe e R is he daily absolu e pe cen age oil p ice change, DVol is he daily dolla ading olume, and Tis
he numbe o ading days in he mon h. Despi e being widely used in esea ch, Amihud’s measu e o
illiquidi y, ILLIQ, p ima ily ocuses on he p ice impac componen o liquidi y and may no ully cap u e
o he aspec s o liquidi y, o example, he bid-ask sp ead. Consequen ly, i p o ides a pa ial pic u e o
o e all liquidi y condi ions. Speci ic ma ke mic os uc u e cha ac e is ics, such as ading ules, ma ke
dep h, o o de book dynamics may also in luence ILLIQ. Despi e hese d awbacks, his measu e o liquidi y
has se e al posi i e sides, as i can easily be compa ed ac oss asse s, is easily unde s ood, and akes only
posi i e alues. The ILLIQ measu e has also been widely adop ed and ex ensi ely used in nume ous empi -
ical s udies, which makes i easie o compa e esul s o one ano he . In his s udy we u ilize he ILLIQ meas-
u e because i p o ides a s aigh o wa d and in ui i e way o cap u e he p ice impac componen o
liquidi y, allowing us o examine he ela ionship be ween liquidi y and asse p ices and assess po en ial
liquidi y isks, as well as compa ing ou esul s wi h ecen indings in he li e a u e.
3.1.3. Fundamen als o he c ude oil ma ke
In s udying he ela ionship be ween p ice and liquidi y in he c ude oil ma ke , we ecognise he in lu-
ence he ma ke ’s undamen als may indi idually and join ly ha e on hese a iables. Based on he
decomposi ion o oil p ice shocks by Kilian (2009) and o he no able s udies which ha e iden i ied he
mac o-economic ac o s which in luence oil ma ke undamen als such as Hamil on (2003); Ra i and
Vespignani (2013); Kang e al. (2016), we include agg ega e demand, agg ega e oil supply, exchange
a e, and money supply as ex e nal eg esso s in he condi ional mean equa ion o he GARCH model o
accoun o hei impac on he ela ionship be ween oil p ice changes and liquidi y.
The weekly US Field P oduc ion o c ude oil (oilp od) is used as a p oxy o agg ega e supply in he
oil ma ke and was ob ained om he Ene gy In o ma ion Associa ion (EIA). The weekly oilp od da ase
spanning Feb ua y 16 h 1996–Ma ch 26 h 2021, was ans o med o mon hly equency o ma ch he
equency o o he a iables used in his s udy. Due o he una ailabili y o global oil p oduc ion da a a
he desi ed equency, we ha e u ilised da a om he US ma ke which is eadily a ailable.
We apply he mon hly Index o Global Economic Ac i i y (ig ea) de i ed by Kilian as a p oxy o
agg ega e demand in he oil ma ke . The ig ea is compu ed as he weigh ed and in la ion-adjus ed pe -
cen age change in he single- oyage ocean shipping eigh a es o se e al bulk d y ca goes. This busi-
ness cycle index is supe io o he p oxies o agg ega e demand used in o he s udies o se e al
easons. Unlike global GDP, he ig ea is a ailable a a highe (mon hly) equency and is immune o he
inc easing in luence o he se ice sec o on he eal GDP o mos coun ies. Unlike indus ial p oduc ion,
he ig ea is a leading indica o o he demand o commodi ies, as shipping a es o commodi ies may
be seen as an indica o o a i m’s u u e p oduc ion.
The US Nominal E ec i e Exchange Ra e (nee ) index, which measu es he dolla alue (USD) agains
a weigh ed a e age o se e al o he o eign cu encies, is he p oxy o he exchange a e in his s udy.
An inc ease in he nee o he dolla indica es ha he dolla has app ecia ed ela i e o se e al o he
cu encies. As he majo i y o ades in he global economy a e denomina ed in he dolla , a change in
he dolla nee index has a s ong in luence on he demand and supply o commodi ies. The mon hly
nee da a was ob ained om he In e na ional Financial S a is ics o he In e na ional Mone a y Fund.
The impo ance o money supply on he undamen als o he oil ma ke was iden i ied in Ra i and
Vespignani (2013) whe e an inc ease in he money supply o China and India was associa ed wi h an
inc ease in global oil p oduc ion and eal agg ega e oil demand. We b oaden he scope wi hin his s udy
and con ol o he impac o global money supply on he commodi y ma ke . As a p oxy o he global
money supply, we u ilise he Money Supply (m1) o he OECD coun ies, which consis s o cu ency (bank-
no es and coins) and o e nigh deposi s. The mon hly m1 da a was ob ained om he OECD da abase.
Aside om he ig ea, all con ol a iables ha e been ans o med by aking hei loga i hmic di e -
ence o ensu e s a iona i y be o e hei inclusion in he eg ession model. This is based on he ecom-
menda ion by Kilian and Zhou (2018) ha he ig ea is a business cycle index which mus no be
di e enced o ans o med in any way.
COGENT ECONOMICS & FINANCE 5
The desc ip i e s a is ics o he a iables unde s udy a e p esen ed in Table 1. On a e age, he B en
ma ke exhibi s highe e u ns han he WTI ma ke , hough he WTI ma ke expe iences g ea e luc ua-
ions and p ice changes du ing he sample pe iod. The maximum and minimum alues e eal ha
he WTI ma ke has highe peaks and lowe oughs han he B en ma ke , which is also e iden in
Figu e 1.Figu e 2 con ains he ime se ies plo o he con ol a iables.
The ILLIQ es ima es o each ma ke sugges ha illiquidi y has a mo e signi ican p ice impac in he
WTI ma ke compa ed o he B en ma ke . The dis ibu ion o p ice impac s due o illiquidi y in he WTI
ma ke exhibi s highe peaks and lowe oughs han hose in he B en ma ke . Fu he mo e, he luc u-
a ions in he ILLIQ alues o bo h ma ke s e lec he e en s in he c ude oil ma ke such as he Global
Financial C isis and he ini ia ion o lockdown es ic ions in ea ly 2020
The skew, ku osis, and Augmen ed Dickey-Fulle (ADF) es s a is ics indica e ha he e u n and
ILLIQ se ies a e no no mally dis ibu ed, bu hey a e end s a iona y. Fu he mo e, he Ljung-Box and
ARCH-LM es s e eal he p esence o au oco ela ion and he e oskedas ici y in he e u n and illiquidi y
ime se ies, sugges ing ha GARCH models a e app op ia e o his da ase .
The deg ee o uncondi ional co ela ion be ween he a iables has been es ima ed using he Pea son
co ela ion es , and he esul s a e p esen ed in Table 2. The Pea son coe icien o he co ela ion
be ween oil p ice changes and illiquidi y is nega i e o he B en and WTI ma ke s, which sugges s ha
a educ ion in he le el o illiquidi y wi hin he ma ke accompanies posi i e oil p ice mo emen s. The e
is a nega i e (posi i e) ela ionship be ween he exchange a e and e u n (illiquidi y) in bo h he B en
Table 1. This able p esen s he desc ip i e s a is ics o he a iables s udied. All a iables ha e been ans o med by
aking he loga i hmic p ice di e ence excep o he Index o Global Real Economic Ac i i y (ig ea). The mean and
s anda d de ia ion alues o B en and WTI e u ns ha e been annualised. The alues o he e u ns o B en and
WTI, Nominal E ec i e Exchange Ra e (nee ), Money Supply (m1), Oil P oduc ion (oilp od), and Global Real Economic
Ac i i y (ig ea) a e gi en in pe cen ages, while he illiquidi y (ILLIQ) se ies ha e been mul iplied by 100. The ADF is
he Augmen ed Dickey-Fulle es o s a iona i y, Q(5) is he Ljung-Box es o au oco ela ion and ARCH (5) es s o
he p esence o ARCH e ec up o 5 lags. (,) deno e signi icance a he 1% and 5% le els.
Desc ip i e s a is ics Mean S d.De Max Min Skew Ku osis ADF Q (5) ARCH (5)
B en e 5.7005 31.1395 22.9488 −49.7617 −1.0199 3.1634 −11.445 31.509 39.643
B en ILLIQ 0.1141 0.1673 1.0227 0.0026 2.2019 5.9246 −4.4973 1149.1 234.98
WTI e 5.1496 34.9048 54.4478 −60.0585 −0.8705 7.6797 −12.127 24.482 188.73
WTIILLIQ 0.0553 0.0760 0.4586 0.0026 2.0944 4.8808 −5.0114 1073 192.5
nee 0.0790 1.2701 6.4856 −3.7891 0.3932 1.6391 −11.676 45.695 16.657
m1 0.9650 4.7767 85.9818 −1.2480 17.3053 304.8411 −11.499 4.7302 0.0210
oilp od 0.1950 2.9329 15.2878 −24.8563 −2.9088 31.3087 −14.334 4.4736 18.822
ig ea 3.6076 66.6258 189.0402 −161.8379 0.6242 0.0570 −3.6012 1131.6 274.59
Figu e 1. Re u n and illiquidi y in he B en and Wes Texas In e media e (WTI) c ude-oil ma ke .
6 U. C. OKOROAFOR AND T. LEIRVIK
and WTI ma ke s. This suppo s he conclusion o Sado sky (2000); Ak am (2009), which shows ha an
inc ease in he exchange a e is associa ed wi h an ad e se change in oil p ice and inc eased illiquidi y
in hese ma ke s. As indica ed in Ra i and Vespignani (2013) and Kang e al. (2016), he co ela ion
be ween money supply and p ice mo emen s in he c ude oil ma ke is posi i e. In e es ingly, he co el-
a ion be ween money supply and illiquidi y is also posi i e, which indica es ha inc eases in money sup-
ply a e associa ed wi h an inc ease in he p ice impac o illiquidi y in he B en and WTI ma ke s.
The co ela ion coe icien be ween oilp od and he a iables indica es ha an inc ease in agg ega e
oil supply is associa ed wi h a educ ion in oil p ice and illiquidi y in he c ude oil ma ke . The easons
o his includes: Supply and demand dynamics: When oil supply inc eases, he a ailabili y o he com-
modi y in he ma ke is g ea e , leading o a be e balance be ween supply and demand. This inc eased
a ailabili y eases he p essu e on p ices and imp o es ma ke liquidi y by acili a ing mo e ading
oppo uni ies. Lowe ansac ion cos s: Wi h g ea e oil supply, he cos o ading (i.e. bid-ask sp eads)
may dec ease as ma ke pa icipan s can ind coun e pa ies mo e easily. Ma ke e iciency: As oil supply
inc eases, he ma ke becomes mo e e icien in e lec ing new in o ma ion, esul ing in a mo e s able
and liquid en i onmen . This s abili y educes he p ice impac o illiquidi y as he ma ke can be e
abso b luc ua ions in supply and demand. Reduced p ice ola ili y: An inc ease in oil supply can lead o
educed p ice ola ili y, as he e is mo e ce ain y abou he a ailabili y o he commodi y. Wi h less
p ice ola ili y, he ma ke is less likely o expe ience ab up changes in liquidi y, which would o he wise
exace ba e he p ice impac o illiquidi y.
In he case o he ig ea, which ep esen s agg ega e demand, he Pea son co ela ion coe icien indi-
ca es ha an inc ease in agg ega e demand is associa ed wi h posi i e p ice mo emen s and educed
illiquidi y in he c ude oil ma ke .
Figu e 2. Time se ies plo o he Nominal E ec i e Exchange Ra e (nee ), Money supply (m1), oil p oduc ion (oilp od)
and he Index o Global Real Economic Ac i i y (ig ea).
Table 2. This able p esen s he Pea son co ela ion be ween he a iables. ILLIQ e e s o he Amihud illiquidi y meas-
u e. The nee , m1, oilp od and ig ea e e o he nominal e ec i e exchange a e, money supply, US Oil p oduc ion,
and Kilian’s index o Global Real Economic Ac i i y. (,,) deno es signi icance a he 1%,5% and 10% le els.
Uncondi ional co ela ion coe icien s B en e B en ILLIQ WTI e WTIILLIQ nee m1 us.oilp od ig ea
B en e 1.0000 −0.0763 0.9285 −0.1166 −0.3958 0.0913−0.1209 0.1463
B en ILLIQ 1.0000 −0.0771 0.9429 0.0712 −0.0035 −0.0852 −0.1873
WTI e 1.0000 −0.1033−0.3851 0.2533 −0.1157 0.1329
WTIILLIQ 1.0000 0.09190.03710 −0.0859 −0.2218
COGENT ECONOMICS & FINANCE 7
Disclosu e s a emen
The au ho s epo he e a e no compe ing in e es s o decla e.
Abou he au ho s
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16 U. C. OKOROAFOR AND T. LEIRVIK
