Identifying Price Bubble Periods in the Energy Sector

42 Pages Posted: 9 Jan 2017 Last revised: 6 Dec 2019

See all articles by Shahil Sharma

Shahil Sharma

Texas A&M University (TAMU) - San Antonio

Diego Escobari

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance; Texas A&M University - Department of Economics

Date Written: 2017

Abstract

In this paper we test for the existence of single and multiple episodes of explosive behavior in three energy sector indices (crude oil, heating oil, and natural gas) and five energy sector spot prices (West Texas Intermediate (WTI), Brent, heating oil, natural gas, and jet fuel). The results from the Supremum Augmented Dickey-Fuller (SADF) and the Generalized SADF tests provide strong statistical evidence of explosive behavior in all of our energy series. A simple theoretical framework of commodity pricing allows us to understand the assumptions to interpret explosive behavior as bubbles. By constructing implied convenience yields using futures prices we test the key assumption and we are able to identify the beginning and the end of bubble periods for the WTI, Brent, heating oil, and natural gas spot prices.

Keywords: Generalized SADF, Energy, Oil, Explosive behavior, Bubbles

JEL Classification: C22, Q02, Q43

Suggested Citation

Sharma, Shahil and Escobari, Diego, Identifying Price Bubble Periods in the Energy Sector (2017). Energy Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2894976 or http://dx.doi.org/10.2139/ssrn.2894976

Shahil Sharma

Texas A&M University (TAMU) - San Antonio ( email )

One University Way
San Antonio, TX 78224
United States

Diego Escobari (Contact Author)

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

HOME PAGE: http://faculty.utrgv.edu/diego.escobari

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

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