How to Construct Monthly VAR Proxies Based on Daily Futures Market Surprises

Lutz Kilian

No 2310, Working Papers from Federal Reserve Bank of Dallas

Abstract: It is common in applied work to estimate responses of macroeconomic aggregates to news shocks derived from surprise changes in daily futures prices around the date of policy announcements. This requires mapping the daily surprises into a monthly shock that may be used as an external instrument in a monthly VAR model or local projection. The standard approach has been to sum these daily surprises over the course of a given month when constructing the monthly proxy variable, ignoring the accounting relationship between daily and average monthly price data. In this paper, I provide a new approach to constructing monthly proxies from daily surprises that takes account of this link and revisit the question of how to use OPEC announcements to identify news shocks in VAR models of the global oil market. The proposed approach calls into question the interpretation of the identified shock as oil supply news and implies quantitatively and qualitatively different estimates of the macroeconomic impact of OPEC announcements.

Keywords: Proxy VAR; instrumental variables; shock aggregation; time aggregation; identification; OPEC; supply news; storage demand; oil futures; oil price expectations (search for similar items in EconPapers)
JEL-codes: C36 C51 E31 E32 E44 Q43 (search for similar items in EconPapers)
Pages: 35
Date: 2023-07-31
New Economics Papers: this item is included in nep-ecm, nep-ene and nep-ets
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Working Paper: How to Construct Monthly VAR Proxies Based on Daily Futures Market Surprises (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:96517

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DOI: 10.24149/wp2310

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