IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v90y2019icp1-18.html
   My bibliography  Save this article

The role of market expectations in commodity price dynamics: Evidence from oil data

Author

Listed:
  • Jin, Xin

Abstract

This paper examines the contribution of market expectations to commodity price dynamics. It proposes a dynamic competitive storage framework with an explicit expectations shock along with concurrent shocks to study the commodity price movements. This allows for a refined analysis of the expectations’ effect on price and inventory and the estimation of the expectations. Applied to the world crude oil market, it finds that the contribution of market expectations to the crude oil spot price movements is limited from 1987 to 2014.

Suggested Citation

  • Jin, Xin, 2019. "The role of market expectations in commodity price dynamics: Evidence from oil data," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 1-18.
    • Handle: RePEc:eee:jimfin:v:90:y:2019:i:c:p:1-18
    DOI: 10.1016/j.jimonfin.2018.09.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0261560618305485
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jimonfin.2018.09.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kilian, Lutz & Lee, Thomas K., 2014. "Quantifying the speculative component in the real price of oil: The role of global oil inventories," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 71-87.
    2. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    3. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
    4. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2012. "On the Sources and Consequences of Oil Price Shocks : The Role of Storage," Working Papers 1230, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    6. Christiane Baumeister & Gert Peersman, 2013. "The Role Of Time‐Varying Price Elasticities In Accounting For Volatility Changes In The Crude Oil Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(7), pages 1087-1109, November.
    7. Xin Jin, 2017. "Do futures prices help forecast the spot price?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(12), pages 1205-1225, December.
    8. David M Arseneau & Sylvain Leduc, 2013. "Commodity Price Movements in a General Equilibrium Model of Storage," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 199-224, April.
    9. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 1-23.
    10. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
    11. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    12. Christopher R. Knittel & Robert S. Pindyck, 2016. "The Simple Economics of Commodity Price Speculation," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(2), pages 85-110, April.
    13. James D. Hamilton, 2009. "Causes and Consequences of the Oil Shock of 2007-08," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 215-283.
    14. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
    15. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    16. Eyal Dvir & Kenneth S. Rogoff, 2009. "Three Epochs of Oil," NBER Working Papers 14927, National Bureau of Economic Research, Inc.
    17. Deaton, Angus & Laroque, Guy, 1995. "Estimating a Nonlinear Rational Expectations Commodity Price Model with Unobservable State Variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(S), pages 9-40, Suppl. De.
    18. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
    19. Luciana Juvenal & Ivan Petrella, 2015. "Speculation in the Oil Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(4), pages 621-649, June.
    20. Robert S. Pindyck, 1994. "Inventories and the Short-Run Dynamics of Commodity Prices," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 141-159, Spring.
    21. Lutz Kilian & Bruce Hicks, 2013. "Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003–2008?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(5), pages 385-394, August.
    22. Kilian, Lutz & Zhou, Xiaoqing, 2018. "Modeling fluctuations in the global demand for commodities," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 54-78.
    23. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    24. Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 273-289.
    25. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
    26. Hurn, A S & Wright, Robert E, 1994. "Geology or Economics? Testing Models of Irreversible Investment Using North Sea Oil Data," Economic Journal, Royal Economic Society, vol. 104(423), pages 363-371, March.
    27. Wright, Brian D & Williams, Jeffrey C, 1982. "The Economic Role of Commodity Storage," Economic Journal, Royal Economic Society, vol. 92(367), pages 596-614, September.
    28. Michael Sockin & Wei Xiong, 2015. "Informational Frictions and Commodity Markets," Journal of Finance, American Finance Association, vol. 70(5), pages 2063-2098, October.
    29. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2012. "On Oil Price Shocks: The Role of Storage," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(4), pages 505-532, December.
    30. Samya Beidas-Strom & Mr. Andrea Pescatori, 2014. "Oil Price Volatility and the Role of Speculation," IMF Working Papers 2014/218, International Monetary Fund.
    31. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, , vol. 30(2), pages 179-206, April.
    32. Kenneth J. Singleton, 2014. "Investor Flows and the 2008 Boom/Bust in Oil Prices," Management Science, INFORMS, vol. 60(2), pages 300-318, February.
    33. Eichenbaum, Martin S., 1984. "Rational expectations and the smoothing properties of inventories of finished goods," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 71-96, July.
    34. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    35. Johannes Mauritzen, 2017. "The Effect of Oil Prices on Field Production: Evidence from the Norwegian Continental Shelf," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(1), pages 124-144, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Haicheng Shu & Peter Spencer, 2023. "Oil prices in the real economy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(6), pages 878-897, September.
    2. Jia, Fei & Shen, Yao & Ren, Junfan & Xu, Xiangyun, 2021. "The impact of offshore exchange rate expectations on onshore exchange rates: The case of Chinese RMB," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    3. Cai, Guixin & Zhang, Hao & Chen, Ziyue, 2019. "Comovement between commodity sectors," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 525(C), pages 1247-1258.
    4. Jiaying Peng & Zhenghui Li & Benjamin M. Drakeford, 2020. "Dynamic Characteristics of Crude Oil Price Fluctuation—From the Perspective of Crude Oil Price Influence Mechanism," Energies, MDPI, vol. 13(17), pages 1-19, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    2. Tumen, Semih & Unalmis, Deren & Unalmis, Ibrahim & Unsal, D. Filiz, 2016. "Taxing fossil fuels under speculative storage," Energy Economics, Elsevier, vol. 53(C), pages 64-75.
    3. Figuerola-Ferretti, Isabel & McCrorie, J. Roderick & Paraskevopoulos, Ioannis, 2020. "Mild explosivity in recent crude oil prices," Energy Economics, Elsevier, vol. 87(C).
    4. Valenti, Daniele & Bastianin, Andrea & Manera, Matteo, 2023. "A weekly structural VAR model of the US crude oil market," Energy Economics, Elsevier, vol. 121(C).
    5. Valenti, Daniele & Manera, Matteo & Sbuelz, Alessandro, 2020. "Interpreting the oil risk premium: Do oil price shocks matter?," Energy Economics, Elsevier, vol. 91(C).
    6. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    7. Yao, Wei & Alexiou, Constantinos, 2024. "On the transmission mechanism between the inventory arbitrage activity, speculative activity and the commodity price under the US QE policy: Evidence from a TVP-VAR model," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1054-1072.
    8. Daniele Valenti, 2018. "Modelling the Global Price of Oil: Is there any Role for the Oil Futures-spot Spread?," Working Papers 2018.06, Fondazione Eni Enrico Mattei.
    9. Liu, Li & Wang, Yudong & Wu, Chongfeng & Wu, Wenfeng, 2016. "Disentangling the determinants of real oil prices," Energy Economics, Elsevier, vol. 56(C), pages 363-373.
    10. Sung Je Byun, 2017. "Speculation in Commodity Futures Markets, Inventories and the Price of Crude Oil," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).
    11. Bilgin, Doga & Ellwanger, Reinhard, 2024. "A simple model of global fuel consumption," Energy Economics, Elsevier, vol. 130(C).
    12. Joëts, Marc & Mignon, Valérie & Razafindrabe, Tovonony, 2017. "Does the volatility of commodity prices reflect macroeconomic uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 313-326.
    13. Olivier Rousse & Benoît Sévi, 2017. "Informed Trading in Oil-Futures Market," Working Papers hal-01460186, HAL.
    14. Kilian, Lutz & Lee, Thomas K., 2014. "Quantifying the speculative component in the real price of oil: The role of global oil inventories," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 71-87.
    15. Simona Delle Chiaie & Laurent Ferrara & Domenico Giannone, 2022. "Common factors of commodity prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(3), pages 461-476, April.
    16. Olivier Rousse & Benoît Sévi, 2016. "Informed Trading in Oil-Futures Market," Working Papers hal-01410093, HAL.
    17. Christiane Baumeister & Lutz Kilian, 2016. "Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 139-160, Winter.
    18. Wen, Xiaoqian & Xie, Yuxin & Pantelous, Athanasios A., 2022. "Extreme price co-movement of commodity futures and industrial production growth: An empirical evaluation," Energy Economics, Elsevier, vol. 108(C).
    19. Saleh Mothana Obadi & Matej Korecek, 2018. "The Crude Oil Price and Speculations: Investigation Using Granger Causality Test," International Journal of Energy Economics and Policy, Econjournals, vol. 8(3), pages 275-282.
    20. Chatziantoniou, Ioannis & Filippidis, Michail & Filis, George & Gabauer, David, 2021. "A closer look into the global determinants of oil price volatility," Energy Economics, Elsevier, vol. 95(C).

    More about this item

    Keywords

    Commodity spot price; Commodity inventory; Expectations shock; Dynamic equilibrium model; State space model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:90:y:2019:i:c:p:1-18. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.