Oil Price Volatility and the Role of Speculation
IMF Working Papers, December 12, 2014
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- Oil Price Volatility and the Role of Speculation
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Bibliographic details
- Authors: Samya Beidas-Strom, Andrea Pescatori
- Published: December 12, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498333481.001
Overview
- Research question: How much does speculation contribute to oil price volatility?
- Approach: Revisit the question by estimating a sign-restricted structural vector autoregression (SVAR).
- Conceptual insight: Using a simple storage model, 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), because both imply a positive co-movement of oil prices and inventories.
Methodology
- Empirical framework: Sign-restricted structural vector autoregression (SVAR).
- Theoretical support: Simple storage model used to relate expectations revisions and derivative-market mispricing to observable price–inventory co-movement.
- Additional identifying assumption: Impact from noise trading shocks in oil derivative markets is temporary; this restriction narrows the set of admissible models.
Key findings
- Observational equivalence:
- Revisions to expectations regarding oil market fundamentals and mispricing in oil derivative markets can be observationally equivalent in the SVAR framework, as both produce a positive co-movement of oil prices and inventories.
- Bound on speculation’s short-term contribution:
- The additional restrictions imply a bound on the contribution of speculation to short-term oil price volatility lying between 3 and 22 percent.
- Comparative magnitudes:
- The estimated short-run impact of speculation is smaller than that of flow demand shocks.
- The estimated short-run impact of speculation is possibly larger than that of flow supply shocks.
Quantitative results and technical terms (preserved)
- Estimated short-run contribution of speculation to oil price volatility: between 3 and 22 percent.
- Methods and concepts referenced exactly as in the source:
- sign-restricted structural vector autoregression (SVAR)
- simple storage model
- Kilian and Murphy (2013)
- noise trading shocks in oil derivative markets
- positive co-movement of oil prices and inventories
- flow demand shocks
- flow supply shocks
Source: Oil Price Volatility and the Role of Speculation, Samya Beidas-Strom and Andrea Pescatori, December 12, 2014.