Identifying Price Bubble Periods in the Energy Sector

Abstract

In this paper we test for the existence of single and multiple episodes of explosive behavior in three energy sector indices (crude oil, heating oil, and natural gas) and five energy sector spot prices (West Texas Intermediate (WTI), Brent, heating oil, natural gas, and jet fuel). The results from the Supremum Augmented Dickey-Fuller (SADF) and the Generalized SADF tests provide strong statistical evidence of explosive behavior in all of our energy series. A simple theoretical framework of commodity pricing allows us to understand the assumptions to interpret explosive behavior as bubbles. By constructing implied convenience yields using futures prices we test the key assumption and we are able to identify the beginning and the end of bubble periods for the WTI, Brent, heating oil, and natural gas spot prices.

The bubble contagion effect of COVID-19 outbreak: Evidence from crude oil and gold markets

“…This negative financial bubble is explained by the excess capacity in the oil market (Baumeister and Kilian, 2016) , the increased leverage of oil firms (Domanski et al. , 2015 ; Tokic, 2015 ) and the increase in non-OPEC oil exports ( Sharm and Escobari, 2018 ). Su et al.…”

Mild explosivity in recent crude oil prices

“…Gronwald (2016) demonstrates a similar period of explosivity as one of three detected within a longer data span, but without tying down dates. Su et al (2017) date-stamped a number of bubbles in spot prices over a thirty-year period, and Sharma and Escobari (2018) and Liu et al (2018) looked at bubble detection in the energy sector as a whole, although precise date-stamping was of secondary importance to their main arguments. Caspi et al (2018) report a longer episode in real prices than detected here, from October 2007 to August 2008, right at the end of their study of historical oil prices using monthly data since the nineteenth century.…”

“…Figuerola-Ferretti et al (2015) and Figuerola-Ferretti and McCrorie (2016) show how the PWY/PSY strategy can be tailored to commodities such as oil, which do not have a natural, observable fundamental playing the role that dividends play to stocks, and where markets can be in backwardation or contango (e.g. Morana, 2013;Sharma and Escobari, 2018).…”

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“…Over the years, financial and energy experts has devoted time to investigate the existence or otherwise of rational bubblesin asset prices 1 (oil prices inclusive). This is premised on the fact that most recent financial crises are preceded by bubbles in real asset prices (Miao and Wang, 2015;Miao, 2014;Miao et al, 2015a;Lammerding et al, 2013;Escobari et al, 2017;Sharma and Escobari, 2018;Branch, 2016;Caspi and Graham, 2018;Branch, 2016;Escobari et al, 2017). The impact of rational bubbles on economic growth management, employment and the financial system cannot be over-emphasized, given the recent evidence from global financial crisis (Kilian, 2008;Leung, 2010; 1 Evidence of rational bubbles implies that no long run relationship exist between asset prices and dividends (Kilian, 2008;Leung, 2010;Ye, et al, 2011;Coleman, 2012;Zhang et al, 2014;Narayan and Narayan, 2014;Maio et al, 2015;Martins and Ventura, 2015;Su et al, 2017) Babajide et al, 2015;Baur and Heaney, 2017;Fashina, et al, 2018;Lawal et al, 2016;Madsen et al, 2018;Madsen et al, 2018;Ibrahim and Alagidede, 2018).…”