Oil Prices and Informational Frictions: The Time-Varying Impact of Fundamentals and Expectations

Joseph Byrne, Marco Lorusso and Bing Xu ()
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Bing Xu: School of Management and Languages G.54 Mary Burton Building Heriot-Watt University Edinburg

No 6, CEERP Working Paper Series from Centre for Energy Economics Research and Policy, Heriot-Watt University

Abstract: 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)
Pages: 42 pages
Date: 2017-06
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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http://ceerp.hw.ac.uk/RePEc/hwc/wpaper/006.pdf First version, 2017 (application/pdf)

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Working Paper: Oil Prices and Informational Frictions: The Time-Varying Impact of Fundamentals and Expectations (2017)
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