Economics at your fingertips  

Revisiting the role of economic uncertainty in oil price fluctuations: Evidence from a new time-varying oil market model

Yongjian Lyu, Heling Yi, Y Wei and Mo Yang

Economic Modelling, 2021, vol. 103, issue C

Abstract: In existing literature, economic uncertainty may have a positive, negative, or insignificant effect on crude oil prices. Based on our newly proposed two-stage tests and empirical analysis, we show that such disagreement is often caused by the conventional assumption on time-invariant market structures. To capture the time-varying market structure, using monthly oil market data in 2000–2020, we construct a new time-varying parameter oil market model. We confirm that economic uncertainty shocks have negative effects on crude oil price returns, and further find that the magnitudes of the time-varying effects are generally countercyclical to oil prices, which may be caused by the malfunctioning conventional stimulation policies during recessions. Furthermore, we show that economic uncertainty shocks dominate fundamental shocks in generating variations in oil price returns during the Global Financial Crisis, which sheds some light on the puzzling price slump that cannot be explained by the fundamentals during that period.

Keywords: Economic uncertainty; Time-varying forecast error variance decomposition; Nonlinear causality; Crude oil market (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.econmod.2021.105616

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2024-02-12
Handle: RePEc:eee:ecmode:v:103:y:2021:i:c:s0264999321002054