Oil Prices and Informational Frictions: The Time-Varying Impact of Fundamentals and Expectations
Joseph Byrne (),
Marco Lorusso and
Bing Xu ()
MPRA Paper from University Library of Munich, Germany
This paper accounts for informational frictions when modelling the time-varying relationship between crude oil prices, traditional fundamentals and expectations. Informational frictions force a wedge between oil prices and supply and/or demand shocks, especially during periods of elevated risk aversion and uncertainty. In such a context expectations can be a key driver of oil price movements. We utilize a variety of proxies for forward-looking expectations, including business confidence, consumer confidence and leading indicators. In addition, our paper implements a time-varying parameter approach to account empirically for time-varying informational frictions. Our results illustrate firstly that oil supply shocks played an important role in both the 1970’s and coinciding with the recent shale oil boom. Secondly, demand had a positive impact upon oil prices, especially from the mid-2000’s. Finally, we provide evidence that oil prices respond strongly to expectations but the source of the shock matter: business leaders’ expectations are positively related, while markets’ expectations are not strongly linked to oil prices.
Keywords: Crude Oil Prices; Informational Frictions; Fundamentals; Expectations; Time-Varying Parameters (search for similar items in EconPapers)
JEL-codes: C30 E30 F00 Q43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-mac
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Working Paper: Oil Prices and Informational Frictions: The Time-Varying Impact of Fundamentals and Expectations (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:80668
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