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Crude oil market efficiency: An empirical investigation via the Shannon entropy

Author

Listed:
  • Walid Mensi
  • Chaker Alaoui
  • Khuong Nguyen

Abstract

This paper evaluates the time-varying degrees of weak-form efficiency of the crude oil markets using the Modified Shannon Entropy (MSE) and the Symbolic Time Series Analysis (STSA) approach. Using daily data from May 20, 1987 to March 6, 2012 for two worldwide crude oil benchmarks (West Texas Intermediate and Europe Brent), our findings reveal that the weak-form market efficiency of two oil markets evolves through time, but with different time trends. Moreover, the WTI market appears to be less efficient than the Europe Brent. These results have several implications for commodity portfolio hedgers and policymakers.

Suggested Citation

  • Walid Mensi & Chaker Alaoui & Khuong Nguyen, 2012. "Crude oil market efficiency: An empirical investigation via the Shannon entropy," International Economics, CEPII research center, issue 129, pages 119-137.
    • Handle: RePEc:cii:cepiie:2012-q1-129-5
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    Citations

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    Cited by:

    1. Clement Moyo & Izunna Anyikwa & Andrew Phiri, 2023. "The Impact of Covid-19 on Oil Market Returns: Has Market Efficiency Being Violated?," International Journal of Energy Economics and Policy, Econjournals, vol. 13(1), pages 118-127, January.
    2. Shternshis, Andrey & Mazzarisi, Piero & Marmi, Stefano, 2022. "Measuring market efficiency: The Shannon entropy of high-frequency financial time series," Chaos, Solitons & Fractals, Elsevier, vol. 162(C).
    3. Mensi, Walid & Hamdi, Atef & Shahzad, Syed Jawad Hussain & Shafiullah, Muhammad & Al-Yahyaee, Khamis Hamed, 2018. "Modeling cross-correlations and efficiency of Islamic and conventional banks from Saudi Arabia: Evidence from MF-DFA and MF-DXA approaches," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 502(C), pages 576-589.
    4. Xiaoxia Wang & Chao Zou & Luqi Wang, 2020. "Analysis on the Temporal Distribution Characteristics of Air Pollution and Its Impact on Human Health under the Noticeable Variation of Residents’ Travel Behavior: A Case of Guangzhou, China," IJERPH, MDPI, vol. 17(14), pages 1-18, July.
    5. Andrey Shternshis & Piero Mazzarisi, 2024. "Variance of entropy for testing time-varying regimes with an application to meme stocks," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 47(1), pages 215-258, June.
    6. Salem Alshihab & Nayef AlShammari, 2020. "Are Kuwaiti Stock Returns Affected by Fluctuations in Oil Prices?," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(6), pages 1-9, December.
    7. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).

    More about this item

    Keywords

    Oil Prices; Information Theory; Shannon Entropy; Market Efficiency;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software

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