A0757
Title: Mild explosivity in recent crude oil prices
Authors: Isabel Figuerola-Ferretti - Universidad Pontificia Comillas (Spain)
Roderick McCrorie - University of St Andrews (United Kingdom) [presenting]
Ioannis Paraskevopoulos - Bankia (Spain)
Abstract: A new, mildly explosive/multiple bubbles technology is used to assess whether crude oil prices exhibited departures from martingale trend behavior over the last decade and to explore whether any such departures can be explained by fundamentals or other proxy variables. The test dates two significant time periods in both Brent and WTI, nominal and real front-month futures prices: a mildly explosive episode during the 2007-08 spike, prior to the peak of the Global Financial Crisis; and a negative such episode during the recent price decline, whose commencement is dated around a key OPEC meeting in November 2014. Evidence using other commodity prices points to explanatory factors beyond commodity markets. A demand-side fundamental is decisive in explaining the episode in mid-2008, in a way that above-ground inventories and excess speculation are not. U.S. fracking was found not to be decisive in the rejection of random walk behavior in oil prices in late-2014. In spite of some recent work tying the CBOE Volatility Index (VIX) to oil futures prices, we find no evidence that the VIX affected price levels during the sample period. The results, shown to be robust to a changing dollar exchange rate and to non-stationary volatility in the shocks driving the oil prices, are compared and contrasted with those obtained by Baumeister and Kilian (2016) using a forecasting approach based on a structural vector autoregressive model.
