Nonlinear joint dynamics between prices of crude oil and refined products

• Nonlinear correlations are stronger in the long-term than in the short-term.
• Financial crisis in 2008–2009 can cause a structural break in cointegration.
• The relations are symmetric most of the time.
• The so-called “asymmetry” is caused by outliers and recent financial crisis.
• Oil prices play the major role but product prices dominated in an unusual regime.

In this paper, we investigate the relationships between crude oil and refined product prices. We find that nonlinear correlations are stronger in the long-term than in the short-term. Crude oil and product prices are cointegrated and financial crisis in 2007–2008 caused a structural break of the cointegrating relationship. Moreover, different from the findings in most studies, we reveal that the relationships are almost symmetric based on a threshold error correction model. The so-called “asymmetric relationships” are caused by some outliers and financial crisis. Most of the time, crude oil prices play the major role in the adjustment process of the long-term equilibrium. However, refined product prices dominated crude oil prices during the period of financial crisis. Important policy and risk management implications can be learned from the empirical findings.