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Smooth transition regime shifts and oil price dynamics

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  • Cifarelli, Giulio

Abstract

The interaction between rational hedgers and informed oil traders is parameterized and tested empirically with the help of a complex non linear smooth transition regime shift CCC-GARCH procedure. In spite of their gyrations, futures price changes are usually self-correcting. Well informed producers and consumers will ensure that crude oil prices – and thus the prices of the corresponding futures contracts – fluctuate within a long run equilibrium range determined by market fundamentals. During a steep price upswing, however, shifts in positions in the futures markets by well informed optimizing agents that usually dampen price changes, result in destabilizing positive feedback trading. Futures price changes that can be classified as speculative are due to destabilizing hedgers' reactions to movements in the variability of the return of their covered cash position. The paper provides in this way an innovative interpretation of the 2008 oil price bubble.

Suggested Citation

  • Cifarelli, Giulio, 2013. "Smooth transition regime shifts and oil price dynamics," Energy Economics, Elsevier, vol. 38(C), pages 160-167.
    • Handle: RePEc:eee:eneeco:v:38:y:2013:i:c:p:160-167
    DOI: 10.1016/j.eneco.2013.03.006
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    References listed on IDEAS

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    Cited by:

    1. Fotini Economou & Konstantinos Gavriilidis & Bartosz Gebka & Vasileios Kallinterakis, 2022. "Feedback trading: a review of theory and empirical evidence," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 15(4), pages 429-476, February.
    2. Alessandro Cologni & Elisa Scarpa & Francesco Giuseppe Sitzia, 2015. "Big Fish: Oil Markets and Speculation," Working Papers 2015.52, Fondazione Eni Enrico Mattei.
    3. Yuhe Zhao & Ronghua Ju, 2025. "Investor Structure and Corn Futures Price Volatility in China: Evidence Based on the Agent-Based Model," Computational Economics, Springer;Society for Computational Economics, vol. 65(2), pages 937-961, February.
    4. Cifarelli, Giulio & Paesani, Paolo, 2018. "Navigating the oil bubble: A non-linear heterogeneous-agent dynamic model of futures oil pricing," MPRA Paper 90470, University Library of Munich, Germany.
    5. repec:aen:journl:ej42-5-cifarelli is not listed on IDEAS
    6. Rahman, Arief & Richards, Russell & Dargusch, Paul & Wadley, David, 2025. "The complexity of transitioning from oil dependency: A dynamic modelling case study of Indonesia," Energy Economics, Elsevier, vol. 148(C).
    7. Giulio Cifarelli & Paolo Paesani, 2017. "On the difficulty of interpreting market behaviour in an uncertain world: the case of oil futures pricing between 2003 and 2016," Working Papers - Economics wp2017_16.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    8. Cologni, Alessandro & Scarpa, Elisa & Sitzia, Francesco Giuseppe, "undated". "Big Fish: Oil Markets and Speculation," Energy: Resources and Markets 206220, Fondazione Eni Enrico Mattei (FEEM).

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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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