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Global economic activity and crude oil prices: A cointegration analysis

  • He, Yanan
  • Wang, Shouyang
  • Lai, Kin Keung
Registered author(s):

    This paper empirically investigates the cointegrating relationship between crude oil prices and global economic activity. The Kilian economic index is used as an indicator of global economic activity. Based on a supply-demand framework and the cointegration theory, we find that real futures prices of crude oil are cointegrated with the Kilian economic index and a trade weighted US dollar index, and crude oil prices are influenced significantly by fluctuations in the Kilian economic index through both long-run equilibrium conditions and short-run impacts. We also develop an empirically stable, data-coherent and single-equation error-correction model (ECM) which has sensible economic properties. Empirical results based on the ECM show that the adjustment implied by a permanent change in the Kilian economic index is a relatively drawn-out process.

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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 32 (2010)
    Issue (Month): 4 (July)
    Pages: 868-876

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    Handle: RePEc:eee:eneeco:v:32:y:2010:i:4:p:868-876
    Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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