Identifying Oil Price Shocks and Their Consequences:Role of Expectations and Financial Factors in the Crude Oil Market

Takuji Fueki, Hiroka Higashi, Naoto Higashio, Jouchi Nakajima, Shinsuke Ohyama and Yoichiro Tamanyu
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Takuji Fueki: Bank of Japan
Hiroka Higashi: Bank of Japan
Naoto Higashio: Bank of Japan
Shinsuke Ohyama: Bank of Japan

No 16-E-17, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper proposes a simple but comprehensive structural vector autoregression (SVAR) model to examine the underlying factors of oil price dynamics by explicitly incorporating the role of expectations on future aggregate demand and oil supply as well as financial investors' role in the crude oil market. Our main findings are threefold. First, our empirical analysis shows that shocks on expectations and financial factors in the oil market explain more than 40 percent of historical oil price fluctuations. In particular, expected future oil supply shocks are more than twice as important as realized and expected aggregate demand shocks or financial factor shocks in accounting for the oil price developments. Second, focusing on a recent large drop in oil prices since 2014, the analysis reveals that expected future oil supply shocks were the dominant driver of oil price falls from January 2014 to January 2015, while expected and realized aggregate demand shocks played a major role in oil price falls from June 2015 to February 2016. Finally, we show that the influence of oil price shocks on global output varies by the nature of each shock.

Keywords: Oil demand and supply; Oil price; Financial factor; Structural vector autoregressive model (search for similar items in EconPapers)
JEL-codes: C32 E44 G12 G15 (search for similar items in EconPapers)
Date: 2016-11-11
New Economics Papers: this item is included in nep-ene and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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