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Testing for short explosive bubbles: A case of Brent oil futures price

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  • Wang, Shaoping
  • Feng, Hao
  • Gao, Da

Abstract

This paper considers the problem of detecting short explosive bubbles in financial data. Based on the backward sup Dickey-Fuller (BSDF), we propose a modified version of BSDF, namely mBSDF. We define the dating statistics by adding a modified term to the BSDF, enhancing the bubble emergence signal. We demonstrate the asymptotic distribution and the bubble duration estimates. A series of Monte Carlo simulations show that mBSDF significantly outperforms BSDF for shorter bubbles, and mBSDF can improve the bubble detection rate by up to 22.7%. As an empirical application, we apply the methods to the Brent crude oil futures price and the results confirm that mBSDF detects the latest oil spike shocked by the Russia-Ukraine conflict and almost all periods of explosive bubbles the oil market has experienced in recent years in contrast to BSDF, which further supports the superiority of mBSDF.

Suggested Citation

  • Wang, Shaoping & Feng, Hao & Gao, Da, 2023. "Testing for short explosive bubbles: A case of Brent oil futures price," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322006730
    DOI: 10.1016/j.frl.2022.103497
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    1. Chen, Weijia & Huang, Shupei & An, Haizhong, 2023. "Revealing dynamic intrinsic temporal and spatial scale characteristics of oil price volatility in bubble and non-bubble periods," Finance Research Letters, Elsevier, vol. 55(PA).
    2. Zhang, Qi & Yang, Kun & Hu, Yi & Jiao, Jianbin & Wang, Shouyang, 2023. "Unveiling the impact of geopolitical conflict on oil prices: A case study of the Russia-Ukraine War and its channels," Energy Economics, Elsevier, vol. 126(C).
    3. Assaf, Ata & Demir, Ender & Ersan, Oguz, 2024. "Detecting and date-stamping bubbles in fan tokens," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 98-113.
    4. Panpan Zhu & Qingjie Zhou & Yinpeng Zhang, 2024. "Investor attention and consumer price index inflation rate: Evidence from the United States," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-12, December.
    5. Nicolas Cofre & Magdalena Mosionek-Schweda, 2023. "A simulated electronic market with speculative behaviour and bubble formation," Papers 2311.12247, arXiv.org.

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