Detecting West Texas Intermediate (WTI) Prices’ Bubble Periods

Theodosios Perifanis

doi:10.3390/en12142649

Abstract

Oil prices have had considerable surges and bursts since the first oil crisis of 1973. Until then its price was stable, with almost zero volatility. Since then, apart from the two oil crises of 1973 and 1978/9, oil prices had consecutive bubble episodes like the surges up to 2008 and 2014 and their successive bursts, respectively. The trace of these bubble periods is of crucial importance for policymakers, since their drivers and consequences impact global economic developments. Phillips et al. and Phillips et al. methodologies are applied to detect whether West Texas Intermediate prices experienced bubble periods. Both methodologies suggest that WTI prices experienced explosive episodes, which could be fundamentally, speculatively, or politically attributed. Some suggested periods coincide for both methods, but the second methodology seems to be more sensitive than its predecessor is, leading to better bubble detection but also to identification of non-existent bubbles. The identified bubble periods are compared to relevant research in the literature concerning their presence, duration, and explosiveness. The main goal of the research, apart from the detection of bubbles’ presence and duration, is to identify the causal underlying reasons for each explosive episode. Further, we compare the start and endpoints of each bubble episode with time-points when structural changes occurred. The contribution of the paper is that it clearly defines the bubble episodes with their corresponding drivers. The paper identifies the importance of market fundamentals’ swifts in explaining the bubble periods. The findings of the papers can help policymakers and other stakeholders to monitor oil price shifts and their underlying reasons, and then proceed with prompt actions. Since bubble episodes are fundamentally explained, then the practical utility is that by focusing on the market fundamentals, stakeholders can avoid actions that could result in market failures.

Highlights

The global oil market suffered heavy disruptions during many periods in the past
The paper is about bubbles and their duration in the West Texas Intermediate (WTI) prices between 1/1/1947 and 1/9/2018
Since the milestone of the 1973 oil crisis, which separated the market into these periods, many researchers tried to detect when the market was in exuberance and whether it was explained fundamentally, politically, or speculatively

Summary

Introduction

The global oil market suffered heavy disruptions during many periods in the past. These periods start from the first oil crisis of 1973. War. The oil price was increasing from 2001 to 2008, when the global financial crisis occurred. 1973, in which a hike is followed by a burst and vice versa This course with structural breaks, sudden upward or downward, called jumps reflect the high volatility of the market. Additional regulation over oil trading will crisis, real oil increasing price will again. Speculation played an additive role again as eroded the financial statements of many market participants, which curtailed their demand for to the negative demand shock. Speculation played an additive role again as eroded the financial statements of many market participants, which curtailed their demand for commodity assets. Oil bubbles can be evident in the future, as rapid changes in the oil market fundamentals like demand and supply shocks can result into explosive prices. This paper is organized as follows: the Literature review follows the Introduction, the Methodology describes the empirical framework, the Results are presented, and the Conclusions are reached

Literature Review

Methodology

Date-Stamping Strategies

Summary Statistics

Empirical Results

Conclusions