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Bubbling over! The behaviour of oil futures along the yield curve

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  • Tsvetanov, Daniel
  • Coakley, Jerry
  • Kellard, Neil

Abstract

Using a rational bubble framework, a future spot price bubble can be shown to induce explosive behaviour in current long maturity futures prices under particular conditions. To assess this empirically, we employ a novel test of the unit root null against a mildly explosive alternative to investigate multiple bubbles in the crude oil spot and a range of futures prices along the yield curve employing monthly and weekly data from 1995 to 2013. The results indicate that the series overwhelmingly exhibit significant bubble periods ending in late 2008 even after allowing for an increase in unconditional volatility. Bubbles in the longer-dated contracts emerged as early as 2004 and are longer lasting than those in nearby and spot contracts. The bubble period was characterised by dramatic shifts in the yield curve associated with institutional spread positions that sharply increased futures prices at longer maturities. The results suggest that periods of time series disconnect between the spot and longer dated futures contracts could potentially form an input into early warning systems for macro-prudential policy.

Suggested Citation

  • Tsvetanov, Daniel & Coakley, Jerry & Kellard, Neil, 2016. "Bubbling over! The behaviour of oil futures along the yield curve," Journal of Empirical Finance, Elsevier, vol. 38(PB), pages 516-533.
    • Handle: RePEc:eee:empfin:v:38:y:2016:i:pb:p:516-533
    DOI: 10.1016/j.jempfin.2015.08.009
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    4. Kruse, Robinson & Wegener, Christoph, 2020. "Time-varying persistence in real oil prices and its determinant," Energy Economics, Elsevier, vol. 85(C).
    5. Darko Vukovic & Moinak Maiti & Zoran Grubisic & Elena M. Grigorieva & Michael Frömmel, 2021. "COVID-19 Pandemic: Is the Crypto Market a Safe Haven? The Impact of the First Wave," Sustainability, MDPI, vol. 13(15), pages 1-17, July.
    6. Efthymios G. Pavlidis & Ivan Paya & David A. Peel, 2018. "Using Market Expectations to Test for Speculative Bubbles in the Crude Oil Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(5), pages 833-856, August.
    7. Zhang, Dayong & Wang, Tiantian & Shi, Xunpeng & Liu, Jia, 2018. "Is hub-based pricing a better choice than oil indexation for natural gas? Evidence from a multiple bubble test," Energy Economics, Elsevier, vol. 76(C), pages 495-503.
    8. Figuerola-Ferretti, Isabel & McCrorie, J. Roderick & Paraskevopoulos, Ioannis, 2020. "Mild explosivity in recent crude oil prices," Energy Economics, Elsevier, vol. 87(C).
    9. Harvey, David I. & Leybourne, Stephen J. & Whitehouse, Emily J., 2020. "Date-stamping multiple bubble regimes," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 226-246.
    10. Li, Yanglin & Wang, Shaoping & Zhao, Qing, 2021. "When does the stock market recover from a crisis?," Finance Research Letters, Elsevier, vol. 39(C).
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    More about this item

    Keywords

    Rational bubbles; Spot and futures prices; Bubble dating algorithm; Macro-prudential policy;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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