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Review of Quantitative Finance and Accounting

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26.02.2016 | Original Research

Financial investor sentiment and the boom/bust in oil prices during 2003–2008

verfasst von: Ding Du, Xiaobing Zhao

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 2/2017

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Abstract

From both theoretical and policy perspectives, it is important to understand if financial speculation contributes to the boom/bust in oil prices during 2003–2008. In this paper, we disentangle the effects of financial speculation from those of economic fundamentals by focusing on exogenous changes of financial speculation in oil markets identified by changes in financial investor sentiment. Furthermore, we focus on a quasi-experiment setting, and investigate both sentiment-driven overvaluation of oil prices and subsequent mispricing correction. Our findings suggest that financial speculation might have contributed to the 2003–2008 boom/bust in oil prices.

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See Fattouh et al. (2013) for an excellent review.

For instance, Baker and Wurgler (2006, 2007) find that investor sentiment helps explain the cross-section of U.S. stock returns. Baker et al. (2012) provide similar international evidence. Stambaugh et al. (2012) show that sentiment helps explain a broad set of stock-market anomalies.

In 2004, index speculators invested $25 billion into commodity futures markets, which is 14 % of the total commodity market (Master 2008).

There is a large literature that studies the comovement between oil and stock markets. See for instance Henning and Shaw (2000), Nandha and Brooks (2009), and Mohanty et al. (2013).

Investor sentiment in financial markets can have significant effects on speculative demand for assets, because (1) investors are subject to sentiment (DeLong et al. 1990), and (2) arbitrage against sentimental investors can be costly and risky (Shleifer and Vishny 1997; Wurgler and Zhuravskaya 2002; Lamont and Thaler 2003; Brunnermeier and Pedersen 2005).

“Sentiment may vary daily, but major episodes occur over years, and the most convincing tests of the effects of sentiment are those in which it is used to actually predict long-horizon returns—tests which suggest a contrarian trading strategy.” (Baker and Wurgler 2007, p. 138).

The U.S. Energy Information Administration also forecasts oil prices for horizons up to two years, which are widely used by practitioners.

We thank Professor Lutz Kilian for making the data available at http://www-personal.umich.edu/~lkilian/.

We thank Professor Jeffrey Wurgler for making these data available at http://people.stern.nyu.edu/jwurgler/.

See also Du et al. (2013) and Huang (2013).

We thank Fama and French for making these data available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/.

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Titel: Financial investor sentiment and the boom/bust in oil prices during 2003–2008
verfasst von: Ding Du
Xiaobing Zhao
Publikationsdatum: 26.02.2016
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 2/2017
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-016-0553-5

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