 Asset Arbitrage and the Price of OilVipin Arora () and Rodney Tyers CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University Abstract: It is commonly understood that macroeconomic shocks influence commodity prices and that one channel for this is the link between interest rates, expected future asset returns and stockholding. In this paper the link is extended to the petroleum market with the recognition that recorded stocks of oil comprise a small share of annual demand and that the parallel with storable commodities is the decision to produce the oil in the first place, as opposed to holding it in the ground as reserve. Oil reserves are then a key asset in producing countries, which is arbitraged against financial assets. Thus, when the yield on financial assets falls, retaining oil reserves becomes more attractive to producing countries, which then have less incentive to accommodate demand rises, and so the oil price rises. This perspective on oil pricing is modeled in a dynamic multi-region general equilibrium framework in which regional households manage portfolios of assets that include oil reserves. When the model is calibrated to match observed data over two decades, simulation results indicate that asset arbitrage made a large contribution to the high pre-GFC oil price. JEL-codes: E37 F47 Q43 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2011-21 Access Statistics for this paper More papers in CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University Contact information at EDIRC. |
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