The relationship between spot and futures oil prices: Do structural breaks matter?

- Examine the effect of breaks on the relation between spot-futures oil prices
- The long-run relation between spot-futures oil prices belongs to a backwardation.
- The presence of the detected structural break switches oil market efficiency.
- The lead-lag relationship can be swayed across both regimes.
- The existent break point indeed affects the forecast of oil futures volatility.

This paper examines the effect of structural breaks on the spot-futures oil prices relationship. We explore the impact of structural breaks on four critical issues, including cointegrating relationships, market efficiency under the expectation hypothesis and the no arbitrage rule, causalities, and forecasting performance of futures oil volatility. As far as our empirical results exhibit, the structural break we detect endogenously causes some influences on these issues, which is in sharp contrast to the conclusions of existing studies. Our findings offer some implications and suggestions to researchers, investors, and policymakers.