Title: Mild explosivity in recent crude oil prices
Authors: Isabel Figuerola-Ferretti - Universidad Carlos III de Madrid (Spain)
Roderick McCrorie - University of St Andrews (United Kingdom) [presenting]
Ioannis Paraskevopoulos - BANKIA (Spain)
Abstract: An analysis of oil prices during and in the aftermath of the Global Financial Crisis is provided. The mildly explosive/multiple bubbles testing strategy is used to assess whether there were any price departures from an underlying stochastic trend and 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 shorter, 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 found to be decisive in the episode in mid-2008; excess speculation is not. U.S. shale oil production, although contributing to the post-June 2014 price decline, is not decisive. We find no evidence the CBOE Volatility Index (VIX) decisively affected oil price levels during the sample period. The results are compared and contrasted with those obtained previously via a forecasting approach based on a structural vector autoregressive model without financial variables. The results offer evidence based on formal statistical testing to resolve a number of recent controversies in the oil price literature.