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Driven by fundamentals or exploded by emotions: Detecting bubbles in oil prices

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  • Umar, Muhammad
  • Su, Chi-Wei
  • Rizvi, Syed Kumail Abbas
  • Lobonţ, Oana-Ramona

Abstract

Crude oil is the world's largest energy commodity, and its domestic and international supplies affect the short-term and long-term economic balances of many countries. It also has a strategic and political role in making important contributions related to the production of reserve assets. Given the increasing and often destabilizing role of the futures market on spot oil prices, this study tries to address the question of whether the oil market behaves efficiently and rationally, or do speculators lead it? Using monthly data from 2000M01–2020M12 for crude oil prices and a range of advanced econometric tools such as breakpoint unit root tests, probability-based bubble detection mechanism, right-tailed Supremum Augmented Dickey-Fuller (SADF), and Generalized SADF (GSADF) approaches based on Monte Carlo and bootstrap critical values, we detect multiple bubbles exhibited by the oil market in different periods. The exact identification of these bubbles is essential to analyze the underlying fundamentals that may have caused these bubbles. It can also help policymakers and regulators to assess the exposure oil prices have towards several economic and fundamental factors. Finally, detecting bubbles and exploring the factors causing them, may help improve the oil market's overall efficiency and thus improve investors' decision-making.

Suggested Citation

  • Umar, Muhammad & Su, Chi-Wei & Rizvi, Syed Kumail Abbas & Lobonţ, Oana-Ramona, 2021. "Driven by fundamentals or exploded by emotions: Detecting bubbles in oil prices," Energy, Elsevier, vol. 231(C).
    • Handle: RePEc:eee:energy:v:231:y:2021:i:c:s036054422101121x
    DOI: 10.1016/j.energy.2021.120873
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    More about this item

    Keywords

    BASDF; Bubble; Crude oil price; Geopolitical and speculative events; GSADF;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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