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The transitory and permanent volatility of oil prices: What implications are there for the US industrial production?


  • Ali Ahmed, Huson Joher
  • Bashar, Omar H.M.N.
  • Wadud, I.K.M. Mokhtarul


This study examines the impact of oil price uncertainty on the US industrial production by decomposing oil price volatility into permanent and transitory components. The decompositions provide important evidence on sources and asymmetric effects of oil price volatility. To estimate the component structure of volatility and to analyse the dynamic impacts of the volatility components, the study uses a threshold based CGARCH and VAR modelling over a period from 1980 to 2010 for the US economy. The CGARCH model estimates show significant asymmetric effect of oil price shock on the transitory oil price volatility. Dynamic impulse response functions obtained from the estimated VAR models reveal that there is a significant and prolonged dampening impact of increased transitory oil price volatility on industrial production. The results also suggest that shocks to transitory component induce increased volatility in the general price level and non-fuel commodity prices in the US. Variance decomposition analysis reconfirms that the transitory volatility is the second most important factor to explain the variance of industrial production. These results provide additional insights on the sources of oil price uncertainty and point to the need to direct US energy policies towards stabilising short-term uncertainties in oil prices.

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  • Ali Ahmed, Huson Joher & Bashar, Omar H.M.N. & Wadud, I.K.M. Mokhtarul, 2012. "The transitory and permanent volatility of oil prices: What implications are there for the US industrial production?," Applied Energy, Elsevier, vol. 92(C), pages 447-455.
  • Handle: RePEc:eee:appene:v:92:y:2012:i:c:p:447-455 DOI: 10.1016/j.apenergy.2011.11.013

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    References listed on IDEAS

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    3. Kolodziej, Marek & Kaufmann, Robert K. & Kulatilaka, Nalin & Bicchetti, David & Maystre, Nicolas, 2014. "Crude oil: Commodity or financial asset?," Energy Economics, Elsevier, vol. 46(C), pages 216-223.
    4. Jia, Xiaoliang & An, Haizhong & Sun, Xiaoqi & Huang, Xuan & Wang, Lijun, 2017. "Evolution of world crude oil market integration and diversification: A wavelet-based complex network perspective," Applied Energy, Elsevier, vol. 185(P2), pages 1788-1798.
    5. Li, Qiming & Cheng, Ke & Yang, Xiaoguang, 2017. "Response pattern of stock returns to international oil price shocks: From the perspective of China’s oil industrial chain," Applied Energy, Elsevier, vol. 185(P2), pages 1821-1831.
    6. Bejbl, Jan & Bemš, Julius & Králík, Tomáš & Starý, Oldřich & Vastl, Jaromír, 2014. "New approach to brown coal pricing using internal rate of return methodology," Applied Energy, Elsevier, vol. 133(C), pages 289-297.
    7. Yýlmaz BAYAR & Cuneyt KILIC, 2014. "Effects of Oil and Natural Gas Prices on Industrial Production in the Eurozone Member Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 4(2), pages 238-247.
    8. Ju, Keyi & Zhou, Dequn & Zhou, P. & Wu, Junmin, 2014. "Macroeconomic effects of oil price shocks in China: An empirical study based on Hilbert–Huang transform and event study," Applied Energy, Elsevier, vol. 136(C), pages 1053-1066.
    9. Moreno, Blanca & García-Álvarez, María Teresa & Ramos, Carmen & Fernández-Vázquez, Esteban, 2014. "A General Maximum Entropy Econometric approach to model industrial electricity prices in Spain: A challenge for the competitiveness," Applied Energy, Elsevier, vol. 135(C), pages 815-824.
    10. Márcio Poletti Laurini & Roberto Baltieri Mauad & Fernando Antonio Lucena Aiube, 2016. "Multivariate Stochastic Volatility-Double Jump Model: an application for oil assets," Working Papers Series 415, Central Bank of Brazil, Research Department.
    11. Ibrahim, Mansor H. & Ahmed, Huson Joher Ali, 2014. "Permanent and transitory oil volatility and aggregate investment in Malaysia," Energy Policy, Elsevier, vol. 67(C), pages 552-563.
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    13. Mulhall, Rachel Ann & Bryson, John R., 2014. "Energy price risk and the sustainability of demand side supply chains," Applied Energy, Elsevier, vol. 123(C), pages 327-334.
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    18. Li, Weiqi & Fu, Feng & Ma, Linwei & Liu, Pei & Li, Zheng & Dai, Yaping, 2013. "A process-based model for estimating the well-to-tank cost of gasoline and diesel in China," Applied Energy, Elsevier, vol. 102(C), pages 718-725.


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