Uncertainty-Dependent and Sign-Dependent Effects of Oil Market Shocks

This paper investigates the uncertainty-dependent and sign-dependent effects of the oil market fundamental shocks, namely supply, aggregate demand and oil-specific demand shocks. We do so by first proposing a novel oil uncertainty index that is measured by the stochastic volatility of the unpredictable component of oil prices. Second, we employ a nonlinear model to show that the structural oil market shocks have distinguishable effects in regimes that are characterized by high versus low oil price uncertainty. Finally, the model is extended to accommodate positive and negative oil market shocks to examine the possible asymmetric effects. In relation to real economic activity, we find that both supply shocks and oil-specific demand shocks have negligible impacts in periods of low oil price uncertainty, but they have sizeable effects in a high-oil-price-uncertainty regime. The effects of oil supply shocks are asymmetric, but oil-specific demand shocks are not, indicating that the (a)symmetric reaction of the real economic activity depends on the underlying oil market shocks.