TY - JOUR

T1 - Time-varying persistence in real oil prices and its determinant

AU - Kruse, Robinson

AU - Wegener, Christoph

PY - 2020/1

Y1 - 2020/1

N2 - We provide empirical evidence for pronounced time-variation in the persistence of real oil prices. In particular, we find episodes of mild explosiveness next to periods with random walk and also mean-reverting behavior. We address the question whether dynamic persistence can be directly related to macro-financial variables, spot-futures spreads, spill-over effects from commodities and global real economic activity. Alongside these variables, we use a large data set of more than one-hundred fifty potential determinants featuring, for example, further oil-related variables (production and inventories) and key macroeconomic series for the G7 countries. By using model averaging techniques, we robustly account for the inherent model uncertainty when dealing with such many potential explanatory variables. As it turns out, the one and only significant measure to explain time-varying oil price persistence is the index of global real economic activity by Kilian (2009). Other variables related to e.g. supply shocks or speculation are, however, insignificant. In line with recent findings, we argue that fundamentals rather than speculation were the drivers of the explosive oil price in the 2000s.

AB - We provide empirical evidence for pronounced time-variation in the persistence of real oil prices. In particular, we find episodes of mild explosiveness next to periods with random walk and also mean-reverting behavior. We address the question whether dynamic persistence can be directly related to macro-financial variables, spot-futures spreads, spill-over effects from commodities and global real economic activity. Alongside these variables, we use a large data set of more than one-hundred fifty potential determinants featuring, for example, further oil-related variables (production and inventories) and key macroeconomic series for the G7 countries. By using model averaging techniques, we robustly account for the inherent model uncertainty when dealing with such many potential explanatory variables. As it turns out, the one and only significant measure to explain time-varying oil price persistence is the index of global real economic activity by Kilian (2009). Other variables related to e.g. supply shocks or speculation are, however, insignificant. In line with recent findings, we argue that fundamentals rather than speculation were the drivers of the explosive oil price in the 2000s.

KW - Economics

KW - Oil prices

KW - Fundamentals

KW - Speculation

KW - Explosiveness

KW - Model averaging

U2 - 10.1016/j.eneco.2019.02.020

DO - 10.1016/j.eneco.2019.02.020

M3 - Journal articles

VL - 85

JO - Energy Economics

JF - Energy Economics

SN - 0140-9883

M1 - 104328

ER -