INVESTIGATING CRUDE OIL FUTURES PRICES IN RELATION TO THE EFFICIENT MARKET HYPOTHESIS

Abstract

The factors causing the drastic changes in crude oil prices have become the focus of researchers over time and have triggered discussions about the efficiency of these markets. The stochastic characteristics of crude oil prices have effects on various economic activities such as forecasting, hedging, speculation and portfolio investment decision-making processes. For this reason, this study aims to test the weak form efficiency of these two markets by using monthly West Texas Intermediate and Brent crude oil futures prices taken between July 1988 and June 2022. In addition to the traditional Augmented Dickey Fuller unit root test, 5 different nonlinear unit root tests were also applied to the data set. Among the findings, the linear ADF test reveals a different result from the others and supports the presence of unit root in both series. However, in other unit root tests applied, the null hypothesis was rejected and it was understood that the markets were stationary, in other words, they were not efficient. The results show that the series exhibit structural breaks with smooth transitions from one regime to another, rather than sharp and instantaneous ones. The inefficiency of the market due to the stationarity of prices shows that the future movements of prices can be predicted by examining the past behavior of prices. Due to the arbitrage opportunities provided, inefficient markets will allow investors to earn abnormal returns.