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Arbitrage and the Price of Oil

  • Vipin Arora

    ()

The model simulated in this paper shows that falling interest rates contribute to rising oil prices. This occurs because oil producers treat oil in the ground as an asset and attempt to arbitrage differences between its rate of return and the interest rate. When calibrated to match observed data over the last two decades, model results indicate that this arbitrage behaviour may have made the largest contribution to the pre-crisis boom in oil prices. Productivity driven growth shocks raise the oil price by about 70 percent, but this rises to 150 percent when falling interest rates are included.

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File URL: http://cbe.anu.edu.au/researchpapers/econ/wp535.pdf
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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2011-535.

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Length: 27 Pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:acb:cbeeco:2011-535
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  7. Vipin Arora, 2011. "Asset Value, Interest Rates and Oil Price Volatility," ANU Working Papers in Economics and Econometrics 2011-536, Australian National University, College of Business and Economics, School of Economics.
  8. Codsi, George & Pearson, K R & Wilcoxen, Peter J, 1992. "General-Purpose Software for Intertemporal Economic Models," Computer Science in Economics & Management, Society for Computational Economics, vol. 5(1), pages 57-79, February.
  9. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  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. Peter B. Dixon & Maureen T. Rimmer, 2009. "Forecasting with a CGE model: does it work?," Centre of Policy Studies/IMPACT Centre Working Papers g-197, Victoria University, Centre of Policy Studies/IMPACT Centre.
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