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

Daniel Tsvetanov, Jerry Coakley and Neil Kellard ()

Journal of Empirical Finance, 2016, vol. 38, issue PB, 516-533

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.

Keywords: Rational bubbles; Spot and futures prices; Bubble dating algorithm; Macro-prudential policy (search for similar items in EconPapers)
JEL-codes: C15 C22 G10 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:38:y:2016:i:pb:p:516-533

DOI: 10.1016/j.jempfin.2015.08.009

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