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Oil Prices and Informational Frictions: The Time-Varying Impact of Fundamentals and Expectations

Listed author(s):
  • Joseph P. Byrne

    ()

    (Department of Accountancy, Economics and Finance, School of Social Sciences, Heriot-Watt University)

  • Marco Lorusso

    ()

    (Centre for Energy Economics Research and Policy, Heriot-Watt University)

  • Bing Xu

    ()

    (School of Management and Languages G.54 Mary Burton Building Heriot-Watt University Edinburg)

This paper accounts for informational frictions when modelling the time-varying relationship between crude oil prices, traditional fundamentals and expectations. Informational frictions force a wedge between oil prices and supply and/or demand shocks, especially during periods of elevated risk aversion and uncertainty. In such a context expectations can be a key driver of oil price movements. We utilize a variety of proxies for forward-looking expectations, including business confidence, consumer confidence and leading indicators. In addition, our paper implements a time-varying parameter approach to account empirically for time-varying informational frictions. Our results illustrate firstly that oil supply shocks played an important role in both the 1970’s and coinciding with the recent shale oil boom. Secondly, demand had a positive impact upon oil prices, especially from the mid-2000’s. Finally, we provide evidence that oil prices respond strongly to expectations but the source of the shock matter: business leaders’ expectations are positively related, while markets’ expectations are not strongly linked to oil prices.

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File URL: http://ceerp.hw.ac.uk/RePEc/hwc/wpaper/006.pdf
File Function: First version, 2017
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Paper provided by Centre for Energy Economics Research and Policy, Heriot-Watt University in its series CEERP Working Paper Series with number 006.

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Length: 42 pages
Date of creation: Jun 2017
Handle: RePEc:hwc:wpaper:006
Contact details of provider: Web page: http://ceerp.hw.ac.uk/

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