Sources of the Volatility Puzzle in the Crude Oil Market

Christiane Baumeister, Gert Peersman () and -
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Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: A remarkable but unnoticed feature of the crude oil market is that the dramatic rise in oil price volatility over time has been accompanied by a substantial fall in oil production volatility. We investigate the reasons for this opposite evolution of both oil market variables. Our main finding is that the observed volatility puzzle can be rationalized by the fact that the price elasticities of both oil supply and oil demand have decreased considerably over time. This implies that small disturbances on either side of the oil market currently generate large price reactions but only modest quantity adjustments. We further document that the variance of innovations which shift oil demand and supply has even become smaller in the more recent past thereby mitigating oil price fluctuations.

Keywords: Oil prices; volatility; time variation; price elasticities (search for similar items in EconPapers)
JEL-codes: E31 E32 Q43 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010-01
New Economics Papers: this item is included in nep-bec, nep-ene and nep-mac
References: View complete reference list from CitEc
Citations: View citations in EconPapers (52)

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:10/634

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