Bubbling over! The behaviour of oil futures along the yield curve

Daniel Tsvetanov, Jerry Coakley, Neil Kellard

Research output: Contribution to journalArticle

13 Citations (Scopus)
11 Downloads (Pure)

Abstract

Using a rational bubble framework, a future spot price bubble can be shown to induce explosive behaviour in current long maturity futures prices under particular conditions. To assess this empirically, we employ a novel test of the unit root null against a mildly explosive alternative to investigate multiple bubbles in the crude oil spot and a range of futures prices along the yield curve employing monthly and weekly data from 1995 to 2013. The results indicate that the series overwhelmingly exhibit significant bubble periods ending in late 2008 even after allowing for an increase in unconditional volatility. Bubbles in the longer-dated contracts emerged as early as 2004 and are longer lasting than those in nearby and spot contracts. The bubble period was characterised by dramatic shifts in the yield curve associated with institutional spread positions that sharply increased futures prices at longer maturities. The results suggest that periods of time series disconnect between the spot and longer dated futures contracts could potentially form an input into early warning systems for macro-prudential policy.
Original languageEnglish
Pages (from-to)516-533
Number of pages18
JournalJournal of Empirical Finance
Volume38
Issue numberPart B
Early online date5 Sep 2015
DOIs
Publication statusPublished - 1 Sep 2016

Keywords

  • Rational bubbles
  • Spot and futures prices
  • Bubble dating algorithm
  • Macro-prudential policy

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