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Title: On speculative bubbles in oil markets: An analysis based on market expectations Authors:  Ivan Paya - Lancaster University (United Kingdom) [presenting]
Efthymios Pavlidis - Lancaster University Management School (United Kingdom)
David Peel - Lancaster University (United Kingdom)
Abstract: Competing arguments have been put forward to explain the huge fluctuations in oil prices from 1990 to 2012, in particular, to the run-up of prices in 2007-08 and its subsequent collapse. The disconnect between oil prices and fundamental factors has been analysed by testing for speculative bubbles. Econometric tests are typically not conclusive because they examine a joint null hypothesis of absence of bubbles, and that the econometrician uses the true model for fundamentals. We contribute to this debate by adopting an approach similar to a recent one proposed to deal with the joint hypothesis problem. Instead of utilising derivative prices to avoid specifying an asset price determination model, we advocate the use of market expectations about future oil prices. A major advantage of market expectations is that the former is not contaminated by a risk premium. By analysing survey data obtained from Consensus Economics, we show that both the spot real oil price and the expected future oil price do individually appear to display periods of explosive dynamics -in line with the presence speculative bubbles in the market. However, recursive right-tail unit root tests on the difference between the expected future price of oil and the actual future spot price does not reject the null of no bubbles for any time period between 1990 and 2012. We therefore conclude against the presence of speculative bubbles in real oil prices during this sample period.