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Identifying price bubble periods in the energy sector

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  • Sharma, Shahil
  • Escobari, Diego

Abstract

In this paper we test for the existence of single and multiple episodes of explosive behavior in three energy sector indices (crude oil, heating oil, and natural gas) and five energy sector spot prices (West Texas Intermediate (WTI), Brent, heating oil, natural gas, and jet fuel). The results from the Supremum Augmented Dickey-Fuller (SADF) and the Generalized SADF tests provide strong statistical evidence of explosive behavior in all of our energy series. A simple theoretical framework of commodity pricing allows us to understand the assumptions to interpret explosive behavior as bubbles. By constructing implied convenience yields using futures prices we test the key assumption and we are able to identify the beginning and the end of bubble periods for the WTI, Brent, heating oil, and natural gas spot prices.

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  • Sharma, Shahil & Escobari, Diego, 2018. "Identifying price bubble periods in the energy sector," Energy Economics, Elsevier, vol. 69(C), pages 418-429.
  • Handle: RePEc:eee:eneeco:v:69:y:2018:i:c:p:418-429
    DOI: 10.1016/j.eneco.2017.12.007
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    Keywords

    Generalized SADF; Energy; Oil; Explosive behavior; Bubbles;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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