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Is WTI crude oil market becoming weakly efficient over time?: New evidence from multiscale analysis based on detrended fluctuation analysis

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  • Wang, Yudong
  • Liu, Li
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    Abstract

    This paper extends the work in Tabak and Cajueiro [Are the crude oil markets becoming weakly efficient over time, Energy Economics 29 (2007) 28-36] and Alvarez-Ramirez et al. [Short-term predictability of crude oil markets: a detrended fluctuation analysis approach, Energy Economics 30 (2008) 2645-2656]. In this paper, we test for the efficiency of WTI crude oil market through observing the dynamic of local Hurst exponents employing the method of rolling window based on multiscale detrended fluctuation analysis. Empirical results show that short-term, medium-term and long-term behaviors were generally turning into efficient behavior over time. However, in this way, the results also show that the market did not evolve along stable conditions for long times. Multiscale analysis is also implemented based on multifractal detrended fluctuation analysis. We found that the small fluctuations of WTI crude oil market were persistent; however, the large fluctuations had high instability, both in the short- and long-terms. Our discussion is also extended by incorporating arguments from the crude oil market structure for explaining the different correlation dynamics.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 32 (2010)
    Issue (Month): 5 (September)
    Pages: 987-992

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    Handle: RePEc:eee:eneeco:v:32:y:2010:i:5:p:987-992

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    Keywords: WTI crude oil market Market efficiency Multiscale Detrended fluctuation analysis;

    References

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    1. Jiang, J. & Ma, K. & Cai, X., 2007. "Non-linear characteristics and long-range correlations in Asian stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 378(2), pages 399-407.
    2. Serletis, Apostolos & Rosenberg, Aryeh Adam, 2007. "The Hurst exponent in energy futures prices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 380(C), pages 325-332.
    3. Alvarez-Ramirez, Jose & Alvarez, Jesus & Rodriguez, Eduardo, 2008. "Short-term predictability of crude oil markets: A detrended fluctuation analysis approach," Energy Economics, Elsevier, vol. 30(5), pages 2645-2656, September.
    4. Elder, John & Serletis, Apostolos, 2008. "Long memory in energy futures prices," Review of Financial Economics, Elsevier, vol. 17(2), pages 146-155.
    5. Alvarez-Ramirez, Jose & Cisneros, Myriam & Ibarra-Valdez, Carlos & Soriano, Angel, 2002. "Multifractal Hurst analysis of crude oil prices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 313(3), pages 651-670.
    6. Alvarez-Ramirez, Jose & Alvarez, Jesus & Rodriguez, Eduardo & Fernandez-Anaya, Guillermo, 2008. "Time-varying Hurst exponent for US stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(24), pages 6159-6169.
    7. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
    8. Kantelhardt, Jan W. & Zschiegner, Stephan A. & Koscielny-Bunde, Eva & Havlin, Shlomo & Bunde, Armin & Stanley, H.Eugene, 2002. "Multifractal detrended fluctuation analysis of nonstationary time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 316(1), pages 87-114.
    9. Dermot Gately & Hiliard G. Huntington, 2002. "The Asymmetric Effects of Changes in Price and Income on Energy and Oil Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 19-55.
    10. Tabak, Benjamin M. & Cajueiro, Daniel O., 2007. "Are the crude oil markets becoming weakly efficient over time? A test for time-varying long-range dependence in prices and volatility," Energy Economics, Elsevier, vol. 29(1), pages 28-36, January.
    11. Uritskaya, Olga Y. & Serletis, Apostolos, 2008. "Quantifying multiscale inefficiency in electricity markets," Energy Economics, Elsevier, vol. 30(6), pages 3109-3117, November.
    12. Brons, Martijn & Nijkamp, Peter & Pels, Eric & Rietveld, Piet, 2008. "A meta-analysis of the price elasticity of gasoline demand. A SUR approach," Energy Economics, Elsevier, vol. 30(5), pages 2105-2122, September.
    13. Serletis, Apostolos & Andreadis, Ioannis, 2004. "Random fractal structures in North American energy markets," Energy Economics, Elsevier, vol. 26(3), pages 389-399, May.
    14. Podobnik, Boris & Fu, Dongfeng & Jagric, Timotej & Grosse, Ivo & Eugene Stanley, H., 2006. "Fractionally integrated process for transition economics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 362(2), pages 465-470.
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    Cited by:
    1. Alvarez-Ramirez, Jose & Alvarez, Jesus & Solis, Ricardo, 2010. "Crude oil market efficiency and modeling: Insights from the multiscaling autocorrelation pattern," Energy Economics, Elsevier, vol. 32(5), pages 993-1000, September.
    2. Martina, Esteban & Rodriguez, Eduardo & Escarela-Perez, Rafael & Alvarez-Ramirez, Jose, 2011. "Multiscale entropy analysis of crude oil price dynamics," Energy Economics, Elsevier, vol. 33(5), pages 936-947, September.
    3. Wang, Yudong & Wu, Chongfeng & Wei, Yu, 2011. "Can GARCH-class models capture long memory in WTI crude oil markets?," Economic Modelling, Elsevier, vol. 28(3), pages 921-927, May.
    4. Liu, Li & Wang, Yudong & Wan, Jieqiu, 2010. "Analysis of efficiency for Shenzhen stock market: Evidence from the source of multifractality," International Review of Financial Analysis, Elsevier, vol. 19(4), pages 237-241, September.

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