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Paper oil and physical oil: has speculative pressure in oil futures increased volatility in spot oil prices?

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  • Babajide Fowowe

Abstract

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 Chan and Maheu, 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.

Suggested Citation

  • Babajide Fowowe, 2014. "Paper oil and physical oil: has speculative pressure in oil futures increased volatility in spot oil prices?," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 38(3), pages 356-372, September.
    • Handle: RePEc:bla:opecrv:v:38:y:2014:i:3:p:356-372
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    References listed on IDEAS

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