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Paper oil and physical oil: has speculative pressure in oil futures increased volatility in spot oil prices?
Author(s) -
Fowowe Babajide
Publication year - 2014
Publication title -
opec energy review
Language(s) - English
Resource type - Journals
eISSN - 1753-0237
pISSN - 1753-0229
DOI - 10.1111/opec.12036
Subject(s) - volatility (finance) , autoregressive conditional heteroskedasticity , futures contract , economics , spot contract , econometrics , financial economics , oil price , crude oil , autoregressive model , monetary economics , petroleum engineering , engineering
A number of authors have attributed the high and volatile oil prices experienced since the turn of the 21st century to increased speculative activities arising from a relaxation of regulations in futures markets. This study examined the effects of speculative pressure on the volatility of spot oil prices. I constructed two measures of speculative pressure and modelled the volatility in oil returns by using the GARCH autoregressive conditional jump intensity model of C han and M aheu, which models the effects of extreme news events in returns. Empirical results showed a significant positive coefficient for speculative pressure, implying that increased speculative pressure has contributed to volatile oil prices. This result is robust to different GARCH estimators and measures of speculative pressure.