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

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  • Kaizhi Yu
  • Yun Zhang
  • Shouwei Li

Abstract

The sharp changes in oil prices since 2004 featured a nonlinear data-generating mechanism which displayed bubble-like behavior. A popular view is that such a salient pattern cannot be explained by shifts in economic fundamentals, but was driven by speculative bubbles as a consequence of the increased financialization of oil future markets. Testing this hypothesis, however, is challenging since the fundamental component of the oil price is unobservable. This paper attempts to isolate the contribution of speculative bubbles and fundamentals to the evolution of oil prices by providing a stylized model of commodity pricing. Motivated by our theoretical model, we adopt a continuous-time model with a random and time-varying persistence parameter to empirically investigate the presence of speculative bubbles in daily oil future prices over the period April 1983 to June 2020. We do not find any evidence in favor of speculative bubbles, although we indeed find that oil prices exhibit episodes of unstable behavior after 2004.

Suggested Citation

  • Kaizhi Yu & Yun Zhang & Shouwei Li, 2021. "Booms and Busts in the Oil Market: Identifying Speculative Bubbles Using a Continuous-Time Dynamic System," Complexity, Hindawi, vol. 2021, pages 1-19, January.
    • Handle: RePEc:hin:complx:8883416
    DOI: 10.1155/2021/8883416
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    Cited by:

    1. Khan, Khalid & Su, Chi Wei & Khurshid, Adnan, 2022. "Do booms and busts identify bubbles in energy prices?," Resources Policy, Elsevier, vol. 76(C).

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