IMF Working Papers

Oil Price Volatility and the Role of Speculation

By Samya Beidas-Strom, Andrea Pescatori

December 12, 2014

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Samya Beidas-Strom, and Andrea Pescatori. Oil Price Volatility and the Role of Speculation, (USA: International Monetary Fund, 2014) accessed September 19, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

How much does speculation contribute to oil price volatility? We revisit this contentious question by estimating a sign-restricted structural vector autoregression (SVAR). First, using a simple storage model, we show that revisions to expectations regarding oil market fundamentals and the effect of mispricing in oil derivative markets can be observationally equivalent in a SVAR model of the world oil market à la Kilian and Murphy (2013), since both imply a positive co-movement of oil prices and inventories. Second, we impose additional restrictions on the set of admissible models embodying the assumption that the impact from noise trading shocks in oil derivative markets is temporary. Our additional restrictions effectively put a bound on the contribution of speculation to short-term oil price volatility (lying between 3 and 22 percent). This estimated short-run impact is smaller than that of flow demand shocks but possibly larger than that of flow supply shocks.

Subject: Commodities, Financial institutions, Financial markets, Futures, Futures markets, Oil, Oil prices, Oil production, Prices, Production

Keywords: Crude oil speculation and inventories, Demand and supply shocks, Elasticity of oil supply, Flow demand shock, Futures, Futures market, Futures markets, Global, Oil, Oil and the business cycle, Oil demand shocks, Oil price, Oil price volatility, Oil prices, Oil production, Price change, Price impact, Price movement, Price response, Residual oil demand shock, Speculative demand shocks, Spot price, Upper bound for the oil price response, Variance decomposition, Vector autoregression (VAR), WP

Publication Details

  • Pages:

    34

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2014/218

  • Stock No:

    WPIEA2014218

  • ISBN:

    9781498333481

  • ISSN:

    1018-5941