Asset Arbitrage and the Price of Oil
It is commonly understood that macroeconomic shocks influence commodity prices and that one channel for this is the link between interest rates, expected future asset returns and stockholding. In this paper the link is extended to the petroleum market with the recognition that recorded stocks of oil comprise a small share of annual demand and that the parallel with storable commodities is the decision to produce the oil in the first place, as opposed to holding it in the ground as reserve. Oil reserves are then a key asset in producing countries, which is arbitraged against financial assets. Thus, when the yield on financial assets falls, retaining oil reserves becomes more attractive to producing countries, which then have less incentive to accommodate demand rises, and so the oil price rises. This perspective on oil pricing is modeled in a dynamic multi-region general equilibrium framework in which regional households manage portfolios of assets that include oil reserves. When the model is calibrated to match observed data over two decades, simulation results indicate that asset arbitrage made a large contribution to the high pre-GFC oil price.
|Date of creation:||Jul 2011|
|Contact details of provider:|| Postal: Crawford Building, Lennox Crossing, Building #132, Canberra ACT 2601|
Phone: +61 2 6125 4705
Fax: +61 2 6125 5448
Web page: http://cama.crawford.anu.edu.au
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeffrey A. Frankel, 2008.
"The Effect of Monetary Policy on Real Commodity Prices,"
NBER Chapters,in: Asset Prices and Monetary Policy, pages 291-333
National Bureau of Economic Research, Inc.
- Jeffrey A. Frankel, 2006. "The Effect of Monetary Policy on Real Commodity Prices," NBER Working Papers 12713, National Bureau of Economic Research, Inc.
- Kilian, Lutz & Rebucci, Alessandro & Spatafora, Nikola, 2009.
"Oil shocks and external balances,"
Journal of International Economics,
Elsevier, vol. 77(2), pages 181-194, April.
- International Monetary Fund, 2007. "Oil Shocks and External Balances," IMF Working Papers 07/110, International Monetary Fund.
- Lutz Kilian & Alessandro Rebucci & Nikola Spatafora, 2007. "Oil Shocks and External Balances," Working Papers 562, Research Seminar in International Economics, University of Michigan.
- Kilian, Lutz & Rebucci, Alessandro & Spatafora, Nikola, 2007. "Oil Shocks and External Balances," CEPR Discussion Papers 6303, C.E.P.R. Discussion Papers.
- Wendner, Ronald, 1999. "A Calibration Procedure of Dynamic CGE Models for Non-steady State Situations Using GEMPACK," Computational Economics, Springer;Society for Computational Economics, vol. 13(3), pages 265-287, June.
- Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
- Akram, Q. Farooq, 2009. "Commodity prices, interest rates and the dollar," Energy Economics, Elsevier, vol. 31(6), pages 838-851, November.
- Menzie D. Chinn & Hiro Ito, 2008. "Global Current Account Imbalances: American Fiscal Policy versus East Asian Savings," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 479-498, August.
- Steven Pennings & Rod Tyers, 2008. "Increasing Returns, Financial Capital Mobility and Real Exchange Rate Dynamics," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages 141-158, September.
- Steven Pennings & Rod Tyers, 2007. "Increasing Returns, Financial Capital Mobility And Real Exchange Rate Dynamics," CAMA Working Papers 2007-16, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
- James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
- Codsi, George & Pearson, K R & Wilcoxen, Peter J, 1992. "General-Purpose Software for Intertemporal Economic Models," Computer Science in Economics & Management, Kluwer;Society for Computational Economics, vol. 5(1), pages 57-79, February.
- 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.
- Vipin Arora, 2011. "Asset Value, Interest Rates and Oil Price Volatility," The Economic Record, The Economic Society of Australia, vol. 87(s1), pages 45-55, September.
- 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.