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The Financialization of Crude Oil Markets and Its Impact on Market Efficiency: Evidence from the Predictive Ability and Performance of Technical Trading Strategies

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  • Cristiana Tudor

    (International Business and Economics Department, The Bucharest University of Economics, 010374 Bucharest, Romania)

  • Andrei Anghel

    (CEO, Finpathic—Roboadvisor, 040672 Bucharest, Romania)

Abstract

Oil price forecasts are of crucial importance for many policy institutions, including the European Central Bank and the Federal Reserve Board, but projecting oil market evolutions remains a complicated task, further exacerbated by the financialization process that characterizes the crude oil markets. The efficiency (in Fama’s sense) of crude oil markets is revisited in this research through the investigation of the predictive ability of technical trading rules (TTRs). The predictive ability and trading performance of a plethora of TTRs are explored on the crude oil markets, as well as on the energy sector ETF XLE, while taking a special focus on the turbulent COVID-19 pandemic period. We are interested in whether technical trading strategies, by signaling the right timing of market entry and exits, can predict oil market movements. Research findings help to confidently conclude on the weak-form efficiency of the WTI crude oil and the XLE fund markets throughout the 1999–2021 period relative to the universe of TTRs. Moreover, results attest that TTRs do not add value to the Brent market beyond what may be expected by chance over the pre-pandemic 1999–2019 period, confirming the efficiency of the market before 2020. Nonetheless, research findings also suggest some temporal inefficiency of the Brent market during the 1 and ¼ years of pandemic period, with important consequences for energy markets’ practitioners and issuers of policy. Research findings further imply that there is evidence of a more intense financialization of the WTI crude oil market, which requires tighter measures from regulators during distressed markets. The Brent oil market is affected mainly by variations in oil demand and supply at the world level and to a lesser degree by financialization and the activity of market practitioners. As such, we conclude that different policies are needed for the two oil markets and also that policy issuers should employ distinct techniques for oil price forecasting.

Suggested Citation

  • Cristiana Tudor & Andrei Anghel, 2021. "The Financialization of Crude Oil Markets and Its Impact on Market Efficiency: Evidence from the Predictive Ability and Performance of Technical Trading Strategies," Energies, MDPI, vol. 14(15), pages 1-19, July.
    • Handle: RePEc:gam:jeners:v:14:y:2021:i:15:p:4485-:d:600832
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    References listed on IDEAS

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    Cited by:

    1. Faheem Aslam & Paulo Ferreira & Haider Ali & Ana Ercília José, 2022. "Application of Multifractal Analysis in Estimating the Reaction of Energy Markets to Geopolitical Acts and Threats," Sustainability, MDPI, vol. 14(10), pages 1-23, May.
    2. An Cheng & Tonghui Chen & Guogang Jiang & Xinru Han, 2021. "Can Major Public Health Emergencies Affect Changes in International Oil Prices?," IJERPH, MDPI, vol. 18(24), pages 1-13, December.
    3. Indre Siksnelyte-Butkiene, 2021. "Impact of the COVID-19 Pandemic to the Sustainability of the Energy Sector," Sustainability, MDPI, vol. 13(23), pages 1-19, November.
    4. Yanhong Feng & Xiaolei Wang & Shuanglian Chen & Yanqiong Liu, 2022. "Impact of Oil Financialization on Oil Price Fluctuation: A Perspective of Heterogeneity," Energies, MDPI, vol. 15(12), pages 1-20, June.
    5. Kazeem Isah & Adedapo Odebode & Oluwafemi Ogunjemilua, 2023. "Does Climate Risk Amplify Oil Market Volatility?," Energy RESEARCH LETTERS, Asia-Pacific Applied Economics Association, vol. 4(2), pages 1-5.
    6. Clement Moyo & Izunna Anyikwa & Andrew Phiri, 2023. "The Impact of Covid-19 on Oil Market Returns: Has Market Efficiency Being Violated?," International Journal of Energy Economics and Policy, Econjournals, vol. 13(1), pages 118-127, January.

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