Testing the oil price efficiency using various measures of long-range dependence

Abstract

In this paper, we empirically examine the application of a host of techniques employed to measure price efficiency through long-range dependence using prices of monthly oil contracts. Using a series of methods, we analyse the volatility (daily absolute returns) of WTI and Brent oil prices for nine different contracts with maturity, ranging from 1 to 9 months, during the sample period of 1990-2017. We use bootstrapping to compute the confidence interval of the parameter of long-range dependence. Our results indicate that on an average, there is no long-range dependence in the volatility of oil price contracts at least at the 10-percent level of significance. Moreover, our results of rolling estimates suggest that the normality assumption does not affect the results considerably, and the results are robust to different rolling window sizes. While the results of the efficiency index suggest that the efficiency of oil returns vary with time, the futures contracts for Brent oil are found to be less efficient compared to WTI oil. The long-term futures contracts are more efficient than short-term contracts.