Price Discovery and Dynamic Linkage between Crude Spot and Futures Market (Brent): A VECM Approach

Abstract

This study examines the dynamic relationship between Brent crude oil spot and futures prices using a time-series econometric framework. Daily spot and futures price data from 31 March 2022 to 31 March 2026 are analysed to assess long-run equilibrium, short-run adjustment, information transmission, and shock responses. The Augmented Dickey-Fuller test is used to determine the order of integration. Both series are non-stationary in levels and stationary after first differencing, indicating integration of order one. Johansen cointegration analysis identifies one cointegrating relationship, supporting a stable long-run association between Brent spot and futures prices. The Vector Error Correction Model indicates that deviations from long-run equilibrium are corrected through adjustment in the spot market. Short-run causality testing using the VAR Granger causality/block exogeneity Wald procedure shows bidirectional predictive causality between changes in spot and futures prices. Impulse response analysis indicates that shocks originating in either market are transmitted to the other but diminish over subsequent periods. Variance decomposition shows that spot-price variation is explained predominantly by its own innovations, whereas futures-price variation reflects substantial contributions from both spot- and futures-market shocks. Residual diagnostics indicate no serious serial-correlation or ARCH problem, although the residuals are not normally distributed. Overall, the findings demonstrate close short- and long-run interaction between Brent spot and futures markets and indicate that information transmission operates in both directions.