Behavioural approach to oil price dynamics: An analysis of the role of behavioural finance in explaining the oil price. Dynamics in the period 2003-2008

Tamila Fonshtain

Student thesis: Master thesis

Abstract

Crude oil has a significant position in society as a crucial input to global, national and individual production and consumption. Therefore, it is a strategic resource that attracts the interest and attention of nearly everyone on the planet. The aim of this thesis is analyse the oil market in the period 2003 – October, 2008 with the purpose of explaining the recent oil price dynamics by supplementing the traditional theory of fundamentals with the theories from behavioural finance. To achieve the goal, first a thorough analysis of the two theoretical frameworks was conducted. Present writer then proceeded to analyse the oil market, its supply and demand factors and the oil price development in order to obtain an understanding of the fundamental drivers of the oil market and factors that influence the oil price formation. A behavioural theories were then used to analyse the latter. The main findings of the thesis showed that the oil market in the outlined period is not as efficient as predicted by the efficient market hypothesis. Furthermore, several market occurrences such as speculation, excessive trading and increasing price volatility indicated that the market exhibited the signs of a speculative bubble. The basic drivers of the observed behaviour was discussed by applying the insights of the behavioural theory. Not surprisingly, the explanatory power of these theories was substantial and contributed to the understanding of the reasons behind investor behaviour as well as the reason for prolonged state of mispricing. The present writer found this topic to be inspiring and exuberant and therefore hopes that the reader finds it just as exiting.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2009
Number of pages88