Nonlinear dynamics in crude oil benchmarks: an AMH perspective

ABSTRACT

We investigate the nonlinear dynamics in global crude oil benchmarks at multiple frequencies from an Adaptive Market Hypothesis perspective. In doing so, we examine the role of time aggregation in the examination of nonlinearity. We find the evidence of neglected nonlinearity to be elusive at higher levels of time aggregation once the returns series is explicitly modeled for conditional heteroscedasticity. While bouts of transient inefficiencies are found to be more pronounced at lower levels of time aggregation, they are interspersed with protracted periods of efficiency. Further, our findings pinpoint the adequacy of appropriate AR-GARCH models in capturing most (if not all) of neglected nonlinearity in crude oil prices. Lastly, our study indicates the critical role played by AMH in elevating the level of scholarly discourse on the efficiency of crude oil benchmarks.

KEYWORDS:

• Nonlinearity
• time aggregation
• crude oil
• market efficiency
• adaptive market hypothesis

JEL CLASSIFICATION:

• C58
• G14
• Q47

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For detailed step-by-step description of the methodological framework followed to arrive at optimal AR-GARCH models, please refer to Madhavan (2014).