Testing for Granger causality in distribution tails: An application to oil markets integration

This paper proposes an original procedure which allows for testing of Granger-causality for multiple risk levels across tail distributions, hence extending the procedure proposed by Hong et al. (2009). Asymptotic and finite sample properties of the test are considered. This new Granger-causality framework is applied for a set of regional oil markets series. It helps to tackle two main questions 1) Whether oil markets are more or less integrated during periods of extreme energetic prices movements and 2) Whether price-setter markets change during such periods. Our findings indicate that the integration level between crude oil markets tends to decrease during extreme periods and that price-setter markets also change. Such results have policy implication and stress the importance of an active energetic policy during episode of extreme movements.

► We extend the Granger-causality test in extreme risk to a multivariate context. ► We study the asymptotic as well as the finite sample properties of the new test. ► We use the test to study crude oil markets dependencies in extreme price movements. ► Results show that WTI and Brent are price setters in extreme movements. ► Additional price setters are also identified.