Discussion Paper

No. 2016-2 | January 15, 2016
What Drives Long-term Oil Market Volatility? Fundamentals versus Speculation

Abstract

This paper explores the role of speculation and economy fundamentals in the oil market using a two-component GARCH-MIDAS model. Particularly, the authors highlight the different role played by changing oil shocks on short-term and long-term components in terms of oil market volatility. The results show that the global demand shock is the only one factor found to be positive and significantly increasing long- or short-term oil volatility in the full sample. This is consistent with a classic host advocating that global demand dominates the oil market. However, impacts of other oil shocks are significantly weakened and even reversed since the year of 2004. In particular, the speculative demand shock plays a role in stabilizing long-term oil volatility during the post-2004 period. The results also suggest the existence of asymmetric impacts on the short-term oil volatility, particularly for shocks from oil supply, oil specific and oil speculative demand.

Data Set

JEL Classification:

Q43

Assessment

  • Downloads: 1452

Links

Cite As

Libo Yin and Yimin Zhou (2016). What Drives Long-term Oil Market Volatility? Fundamentals versus Speculation. Economics Discussion Papers, No 2016-2, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-2


Comments and Questions


Anonymous - Contents and Methods adopted
January 16, 2016 - 15:25

The topic of the following article is coming current in this period in which the oil price is continuing decreasing. So the argument choose is appropriate.
Respect to the model and the quantitative tools adopted the choice is appropriate. The GARCH-MIDAS model (introduced by Engle and others scholars) ...[more]

... allows to link the daily observations on stock returns with macroeconomic variables, sampled at lower frequencies, in order to examine directly the macroeconomic variables’ impact on the stock or commodities volatility. This aspect is particularly relevant because one of the most common bias in the econometric research is produced by the specification of the variables, and tools adopted.
The approach adopted which consists in separate the long from the short period, the demand and the supply, and isolate the speculative effect is good and permit to design a nexus of casualty which is too often characterized by an high level of complexity which is sometimes biased in high level of confusion.

For the results it is need considers that although the finding are clear from the tables, and the graph, must be explained and interpreted with more accurateness by the words.
The role of speculation as expressed in the current research is limited and often autocorrelated, because is built on the same information adopted for the forecast of macro-scenario.

Surely a positive and interesting research which can be useful even as key of lecture for the recent price movements of the oil.

Thank You for your attention


Anonymous - Referee Report 1
January 18, 2016 - 13:26

This is an interesting piece of work trying to relate oil price volatility with structural oil shocks using a GARCH-MIDAS. The methodology is motivated by the fact that oil volatility, i.e., the dependent variable is at daily frequency, while the structural shocks, derived from a now-standard sign-restricted VAR model of ...[more]

... real oil price, are at monthly frequencies. However, I have two major concerns: (i) First, the generated structural shocks depends essentially on the real oil price. So how might the results change, if only real oil price is used, instead of the shocks. Will the model produce a better in-sample fit, for instance from what it is currently? I understand that one will not be able to analyze the impact of various shocks, but it would be interesting to see how the realized price of real oil itself affects this volatility (ii) Now the real oil price is based on the refiner's acquisition cost, but the daily data is that of the WTI oil price. What happens if one uses the monthly average of the daily WTI oil price.

In addition, a third is related to the data. Why does the data start from 1990 and not 1986? The global activity index starts from 1968 on Lutz Kilian's website, and WTI is available from 1986 at daily frequency. May be it would also be good to extend the data till 2015, given the recent collapse of the oil price.


Anonymous - Reply to Referee Report 1
March 28, 2016 - 14:57

We are truly grateful to your critical comments and thoughtful suggestions. In the attachment, you will find our point-by-point responses to the comments/ questions. For the sake of presentation, the comments of the referees are numbered and duplicated in italics, and our responses are given in plain Roman.


Anonymous - Referee Report 2
February 05, 2016 - 11:11

see attached file


Anonymous - Reply to Referee Report 2
March 28, 2016 - 14:58

We are truly grateful to your critical comments and thoughtful suggestions. In the attachment, you will find our point-by-point responses to the comments/ questions. For the sake of presentation, the comments of the referees are numbered and duplicated in italics, and our responses are given in plain Roman.


Anonymous - Referee Report 3
March 02, 2016 - 12:11

see attached file


Anonymous - Reply to Referee Report 3
March 28, 2016 - 14:59

We are truly grateful to your critical comments and thoughtful suggestions. In the attachment, you will find our point-by-point responses to the comments/ questions. For the sake of presentation, the comments of the referees are numbered and duplicated in italics, and our responses are given in plain Roman.