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

Research output: Working paperDiscussion paper

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.
Original languageEnglish
StatePublished - Jun 2017

Publication series

NameCEERP Working Paper
PublisherCentre for Energy Economics Research and Policy
No.6

Fingerprint

oil price
expectation
oils
oil
friction
time
Friction
shock
Shock
Time-varying
confidence
demand
impact
Industry
Confidence
oil supply
oil shale
crude oil
market
modeling

Cite this

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title = "Oil Prices and Informational Frictions: The Time-Varying Impact of Fundamentals and Expectations",
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.",
author = "Byrne, {Joseph Paul} and Marco Lorusso and Bing Xu",
year = "2017",
month = "6",
series = "CEERP Working Paper",
publisher = "Centre for Energy Economics Research and Policy",
number = "6",
type = "WorkingPaper",
institution = "Centre for Energy Economics Research and Policy",

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TY - UNPB

T1 - Oil Prices and Informational Frictions: The Time-Varying Impact of Fundamentals and Expectations

AU - Byrne,Joseph Paul

AU - Lorusso,Marco

AU - Xu,Bing

PY - 2017/6

Y1 - 2017/6

N2 - 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.

AB - 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.

M3 - Discussion paper

T3 - CEERP Working Paper

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

ER -