Mild explosivity in recent crude oil prices

Abstract

This paper provides an analysis of oil prices during and in the aftermath of the Global Financial Crisis, concentrating on the 2007-08 price spike and the 2014-16 price decline. The mildly explosive/multiple bubbles testing strategy by Phillips, Shi and Yu (2015, International Economic Review 56(4), 1043-1133) is used to test for price departures from an underlying stochastic trend and to assess whether any such departures can be explained by fundamentals or other proxy variables. The test dates two significant time periods in both Brent and WTI nominal and real front-month futures prices: a mildly explosive episode during the 2007-08 spike, prior to the peak of the Global Financial Crisis; and a significantly shorter, negative such episode during the 2014-16 price decline, whose commencement is dated around a key OPEC meeting in November 2014. Evidence using other commodity prices points to explanatory factors beyond commodity markets. A global economic activity proxy is found to be decisive in the episode in mid-2008; excess speculation is not. U.S. shale oil production, though contributing to the post-June 2014 price decline, is not seen to have been decisive. Against some recent work tying the CBOE Volatility Index (VIX) to oil futures prices, we find no evidence that the VIX decisively affected oil price levels during the sample period. The results are compared and contrasted with those obtained by Baumeister and Kilian (2016, Journal of the Association of Environmental and Resource Economists 3, 131-158) via a forecasting approach based on a structural vector autoregressive model without financial variables. Taken altogether, the results herein provide new evidence based on formal statistical testing that help resolve a number of recent controversies in the oil price literature.

Detecting West Texas Intermediate (WTI) Prices’ Bubble Periods

“…They suggest that a speculative bubble was present in the pre-2008 burst. Figuerola-Ferretti et al [54] suggest two bubbles in Brent and WTI prices, one positive prior the 2008 crisis and a negative one between 2014 and 2016. Global economic activity can well explain the first one, but speculation cannot.…”

U.S. stock prices and the dot.com-bubble: Can dividend policy rescue the efficient market hypothesis?

“…One of the most important recent contributions is the approach by Phillips, Wu & Yu (2011), which has been very influential for numerous empirical studies as it takes the critique of Evans (1991) that conventional unit root and cointegration tests have little power for periodically collapsing bubbles, into account. Given this approach, right-tailed unit root testing has been used in different segments of global financial markets, ranging from equity markets to housing markets to commodity futures such as crude oil markets (see, for example, Homm & Breitung, 2012, Kivedal, 2013, Engsted, Hviid & Pedersen, 2016, Pavlidis, Paya & Peel, 2017, Figuerola-Ferretti, McCrorie & Paraskevopoulos, 2019.…”

Booms and Busts in the Oil Market: Identifying Speculative Bubbles Using a Continuous‐Time Dynamic System

“…ey found statistical evidence of the presence of a short price bubble between March and July 2008. Tsvetanov et al [17], Figuerola-Ferretti et al [18], and Caspi et al [39] employed the GSADF test of PSY using different samples and reported multiple bubble episodes of oil price explosivity during the period under examination.…”

“…As shown in Tao et al [25], when σ 2 � 0, model ( 21) collapses to a simple autoregression with a constant coefficient. It explains why a popular way to look for bubbles is to test ϕ � 0 against ϕ > 0 via standard or recursive right-tailed unit root tests [15][16][17][18]27]. For the purpose of the present paper, we only examine three price behavior features that are divided into three categories:…”

“…Our paper is not the first to look at whether bubbles are a key characteristic of the changes in oil prices. In fact, a growing body of empirical research has extensively applied the supremum augmented Dickey-Fuller (SADF) test of Phillips et al [13] (PWY hereafter) and generalized supremum augmented Dickey-Fuller (GSADF) test proposed by Phillips et al [14,15] (PSY hereafter) to examine the possible presence of speculative bubbles [16][17][18]. e general idea of the SADF and GSADF methods involves a recursive evolving algorithm coupled with right-tailed unit root tests.…”