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What drives long-term oil market volatility? Fundamentals versus Speculation

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  • Yin, Libo
  • Zhou, Yimin

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.

Suggested Citation

  • Yin, Libo & Zhou, Yimin, 2016. "What drives long-term oil market volatility? Fundamentals versus Speculation," Economics Discussion Papers 2016-2, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:20162
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    Cited by:

    1. Afees A. Salisu & Rangan Gupta & Elie Bouri & Qiang Ji, 2020. "Forecasting Oil Volatility Using a GARCH-MIDAS Approach: The Role of Global Economic Conditions," Working Papers 202051, University of Pretoria, Department of Economics.
    2. Duc Khuong Nguyen & Thomas Walther, 2020. "Modeling and forecasting commodity market volatility with long‐term economic and financial variables," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(2), pages 126-142, March.
    3. Salisu, Afees A. & Gupta, Rangan & Demirer, Riza, 2022. "Global financial cycle and the predictability of oil market volatility: Evidence from a GARCH-MIDAS model," Energy Economics, Elsevier, vol. 108(C).
    4. Mo, Di & Gupta, Rakesh & Li, Bin & Singh, Tarlok, 2018. "The macroeconomic determinants of commodity futures volatility: Evidence from Chinese and Indian markets," Economic Modelling, Elsevier, vol. 70(C), pages 543-560.
    5. Wei, Yu & Liu, Jing & Lai, Xiaodong & Hu, Yang, 2017. "Which determinant is the most informative in forecasting crude oil market volatility: Fundamental, speculation, or uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 141-150.
    6. Ramaprasad Bhar & Anastasios G. Malliaris & Mary Malliaris, 2021. "What Has Driven the U.S. Monthly Oil Production Since 2009? Empirical Results from Two Modeling Approaches," JRFM, MDPI, vol. 14(2), pages 1-11, February.

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    More about this item

    Keywords

    oil shocks; economy fundamentals; speculation; long/short-term oil volatility; GARCH-MIDAS model;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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