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In this study, we investigate the dynamic relationship between return and liquidity in the Brent and the West Texas Intermediate (WTI) oil markets. The research utilises daily oil price and volume data and monthly macroeconomic data from January 1, 1996 to April 28, 2023 obtained from the Energy Information Association (EIA), the Organisation for Economic Co-operation and Development (OECD), the Federal Reserve Economic Data (FRED), investing.com, and the International Monetary Fund (IMF). We employ the ARMAX(1,1)-aDCC-GARCH-t(1,1) model to capture time-varying associations between return and liquidity. Our findings reveal a significant impact of speculation on the return-liquidity relationship, which is more persistent in the WTI market. Furthermore, we observe a pattern between the Brent and WTI markets during the study period, which the heterogeneous trader hypothesis can explain. These insights hold implications for policymakers aiming to enhance the crude oil market's stability, as well as for market traders in developing trading and risk management strategies.
Okoroafor et al. (2024) studied this question.