Oil Price Volatility and the Role of Speculation

How much does speculation contribute to oil price volatility? We revisit this contentious question by estimating a sign-restricted structural vector autoregression (SVAR). First, using a simple storage model, we show that revisions to expectations regarding oil market fundamentals and the effect of mispricing in oil derivative markets can be observationally equivalent in a SVAR model of the world oil market à la Kilian and Murphy (2013), since both imply a positive co-movement of oil prices and inventories. Second, we impose additional restrictions on the set of admissible models embodying the assumption that the impact from noise trading shocks in oil derivative markets is temporary. Our additional restrictions effectively put a bound on the contribution of speculation to short-term oil price volatility (lying between 3 and 22 percent). This estimated short-run impact is smaller than that of flow demand shocks but possibly larger than that of flow supply shocks.
Publication date: December 2014
ISBN: 9781498333481
$18.00
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Topics covered in this book

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Economics- Macroeconomics , Economics / General , International - Economics , oil and the business cycle , crude oil speculation and inventories , demand and supply shocks , oil price volatility , vector autoregression (VAR)

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