Article ID Journal Published Year Pages File Type
977734 Physica A: Statistical Mechanics and its Applications 2015 11 Pages PDF
Abstract

•We investigate the fundamental price and price bubbles of WTI crude oil.•There exist significant oil price bubbles during 2003–2012.•The fundamental oil price fluctuates less than that of the market trading price.•There exists significant two-state regime switching in WTI oil price bubbles.•WTI oil price bubbles mainly evolve between upheaval and stable states.

The sharp volatility of West Texas Intermediate (WTI) crude oil price in the past decade triggers us to investigate the price bubbles and their evolving process. Empirical results indicate that the fundamental price of WTI crude oil appears relatively more stable than that of the market-trading price, which verifies the existence of oil price bubbles during the sample period. Besides, by allowing the WTI crude oil price bubble process to switch between two states (regimes) according to a first-order Markov chain, we are able to statistically discriminate upheaval from stable states in the crude oil price bubble process; and in most of time, the stable state dominates the WTI crude oil price bubbles while the upheaval state usually proves short-lived and accompanies unexpected market events.

Related Topics
Physical Sciences and Engineering Mathematics Mathematical Physics
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