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

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  • Byrne, Joseph P
  • Lorusso, Marco
  • Xu, Bing

Abstract

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.

Suggested Citation

  • Byrne, Joseph P & Lorusso, Marco & Xu, Bing, 2017. "Oil Prices and Informational Frictions: The Time-Varying Impact of Fundamentals and Expectations," MPRA Paper 80668, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:80668
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    References listed on IDEAS

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    1. repec:gam:jeners:v:11:y:2018:i:5:p:1207-:d:145404 is not listed on IDEAS
    2. Takuji Fueki & Hiroka Higashi & Naoto Higashio & Jouchi Nakajima & Shinsuke Ohyama & Yoichiro Tamanyu, 2018. "Identifying oil price shocks and their consequences: the role of expectations in the crude oil market," BIS Working Papers 725, Bank for International Settlements.

    More about this item

    Keywords

    Crude Oil Prices; Informational Frictions; Fundamentals; Expectations; Time-Varying Parameters;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F00 - International Economics - - General - - - General
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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