Structural breaks and the time-varying levels of weak-form efficiency in crude oil markets: Evidence from the Hurst exponent and Shannon entropy methods

Walid Mensi, Makram Beljid, Shunsuke Managi

Research output: Contribution to journalArticle

10 Citations (Scopus)

Abstract

This paper examines the time-varying levels of weak-form efficiency and the presence of structural breaks for two worldwide crude oil benchmarks over the period spanning from January 2, 1990, through September 18, 2012. We use two different econophysics approaches for comparison purposes. The Hurst exponent is provided by the scaled range R/S analysis to measure the degree of long-range dependency exhibited by the West Texas Intermediate (WTI) and European Brent crude oil indices. The Shannon entropy approach, which is based on a symbolic time series analysis (STSA), allows a ranking of market-level efficiency. The empirical results show that the European Brent index is less inefficient than the WTI index for both methods. Moreover, we find that the Hurst exponent displays better performance than the Shannon entropy method. The Hurst exponent is also more effective than the Shannon entropy in detecting financial crashes and crises as well as extreme events, such as wars and terrorist attacks. These findings have several implications for commodity portfolio hedgers and risk managers.

Original languageEnglish
Pages (from-to)89-106
Number of pages18
JournalInternational Economics
Volume140
DOIs
Publication statusPublished - Dec 1 2014
Externally publishedYes

Fingerprint

Hurst exponent
Crude oil
Entropy
Weak-form efficiency
Time-varying
Structural breaks
Oil markets
Time series analysis
Commodities
Terrorist attack
Empirical results
Econophysics
Crash
R/S analysis
Benchmark
Managers
Extreme events
Ranking

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting(all)
  • Economics, Econometrics and Finance(all)

Cite this

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