Endogenous Uncertainty in the Oil Market: A Bayesian Stochastic Volatility-in-Mean Analysis

There continues to be considerable interest in the relationship between oil market fundamentals, oil prices, and uncertainty. This paper examines the impact of oil market uncertainty shocks upon oil fundamentals and prices. We utilise a Bayesian stochastic volatility-in-mean VAR approach, which endogenously models oil market uncertainty and allows the data to dynamically impact uncertainty. We find evidence that supply uncertainty shocks are linked to demand uncertainty, and that supply shocks are associated with a fairly pronounced increase in oil price uncertainty.