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Do Financial Investors Destabilize the Oil Price?

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  • M. J. LOMBARDI
  • I. VAN ROBAYS

    ()

Abstract

We assess whether and to what extent ?nancial activity in the oil futures markets has contributed to destabilize oil prices in recent years. We de?ne a destabilizing ?nancial shock as a shift in oil prices that is not related to current and expected fun- damentals, and thereby distorts e¢ cient pricing in the oil market. Using a structural VAR model identi?ed with sign restrictions, we disentangle this non-fundamental ?- nancial shock from fundamental shocks to oil supply and demand to determine their relative importance. We ?nd that shocks to oil demand and supply remain the main drivers of oil price swings. Financial investors in the futures market can however destabilize oil spot prices, although only in the short run. Moreover, ?nancial ac- tivity appears to have exacerbated gyrations in the oil market over the past decade, particularly in 2007-2009.

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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 11/760.

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Length: 37 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:rug:rugwps:11/760

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Keywords: Oil price; Speculation; Structural VAR; Sign restrictions.;

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