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Do oil prices respond to real interest rates?

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  • Arora, Vipin
  • Tanner, Matthew

Abstract

We show that the robustness of an inverse relationship between the real interest rate and real oil price depends crucially on how the real interest rate is calculated, and the time-frame of the sample. Consistent with earlier studies, we find that the oil price falls with an unexpected rise in either U.S. or international ex-ante real interest rates. When the ex-post real interest rate is used, the oil price only falls with rises to short-term rates (3months or less). Additionally, the response of the oil price to long-term ex-ante real interest rates must include the period through the mid-2000s for the inverse relationship to appear. In contrast, the oil price consistently falls with unexpected rises in short-term real interest rates throughout the entire sample. We draw two conclusions from the results. The first is that the oil price is consistently responsive to short-term U.S. and international real interest rates, underlying the importance of storage. Second, oil prices have become more responsive to long-term real interest rates over time.

Suggested Citation

  • Arora, Vipin & Tanner, Matthew, 2013. "Do oil prices respond to real interest rates?," Energy Economics, Elsevier, vol. 36(C), pages 546-555.
  • Handle: RePEc:eee:eneeco:v:36:y:2013:i:c:p:546-555
    DOI: 10.1016/j.eneco.2012.11.001
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    8. Benjamin Cheng & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2016. "Empirical Pricing Performance in Long-Dated Crude Oil Derivatives: Do Models with Stochastic Interest Rates Matter?," Research Paper Series 367, Quantitative Finance Research Centre, University of Technology, Sydney.
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    14. Śmiech, Sławomir & Papież, Monika & Dąbrowski, Marek A., 2015. "Does the euro area macroeconomy affect global commodity prices? Evidence from a SVAR approach," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 485-503.
    15. Wanling Huang & André Varella Mollick & Khoa Huu Nguyen, 2017. "Dynamic responses and tail-dependence among commodities, the US real interest rate and the dollar," Empirical Economics, Springer, vol. 53(3), pages 959-997, November.
    16. Kim, Jong-Min & Tabacu, Lucia & Jung, Hojin, 2020. "A quantile-copula approach to dependence between financial assets," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    17. Drachal, Krzysztof, 2018. "Comparison between Bayesian and information-theoretic model averaging: Fossil fuels prices example," Energy Economics, Elsevier, vol. 74(C), pages 208-251.
    18. Yin, Libo & Yang, Qingyuan, 2016. "Predicting the oil prices: Do technical indicators help?," Energy Economics, Elsevier, vol. 56(C), pages 338-350.
    19. Cheng, Benjamin & Nikitopoulos, Christina Sklibosios & Schlögl, Erik, 2018. "Pricing of long-dated commodity derivatives: Do stochastic interest rates matter?," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 148-166.
    20. Ma, Richie Ruchuan & Xiong, Tao, 2021. "Price explosiveness in nonferrous metal futures markets," Economic Modelling, Elsevier, vol. 94(C), pages 75-90.
    21. Kim, Jong-Min & Jung, Hojin, 2017. "Can asymmetric conditional volatility imply asymmetric tail dependence?," Economic Modelling, Elsevier, vol. 64(C), pages 409-418.
    22. Wan, Jer-Yuh & Kao, Chung-Wei, 2015. "Interactions between oil and financial markets — Do conditions of financial stress matter?," Energy Economics, Elsevier, vol. 52(PA), pages 160-175.
    23. Yanhong Feng & Dilong Xu & Pierre Failler & Tinghui Li, 2020. "Research on the Time-Varying Impact of Economic Policy Uncertainty on Crude Oil Price Fluctuation," Sustainability, MDPI, Open Access Journal, vol. 12(16), pages 1-24, August.
    24. Papież, Monika & Śmiech, Sławomir, 2015. "Dynamic steam coal market integration: Evidence from rolling cointegration analysis," Energy Economics, Elsevier, vol. 51(C), pages 510-520.
    25. Papież, Monika & Śmiech, Sławomir & Dąbrowski, Marek A., 2014. "The impact of the Euro area macroeconomy on energy and non-energy global commodity prices," MPRA Paper 56663, University Library of Munich, Germany.

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    More about this item

    Keywords

    Oil price; Real interest rate; VAR; Hotelling; Storage;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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