Do Financial Investors Destabilize the Oil Price?

40 Pages Posted: 2 Jun 2011

See all articles by Marco J. Lombardi

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

Ine Van Robays

European Central Bank

Date Written: May 20, 2011

Abstract

In this paper, we assess whether and to what extent financial activity in the oil futures markets has contributed to destabilize oil prices in recent years. We define a destabilizing financial shock as a shift in oil prices that is not related to current and expected fundamentals, and thereby distorts efficient pricing in the oil market. Using a structural VAR model identified with sign restrictions, we disentangle this non-fundamental financial shock from fundamental shocks to oil supply and demand to determine their relative importance. We find that financial investors in the futures market can destabilize oil spot prices, although only in the short run. Moreover, financial activity appears to have exacerbated the volatility in the oil market over the past decade, particularly in 2007-2008. However, shocks to oil demand and supply remain the main drivers of oil price swings.

Keywords: oil price, speculation, structural VAR, sign restrictions

JEL Classification: C32, Q41, Q31

Suggested Citation

Lombardi, Marco Jacopo and Van Robays, Ine, Do Financial Investors Destabilize the Oil Price? (May 20, 2011). ECB Working Paper No. 1346. Available at SSRN: https://ssrn.com/abstract=1847503

Marco Jacopo Lombardi (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

Ine Van Robays

European Central Bank ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany
+496913446179 (Phone)

HOME PAGE: http://https://sites.google.com/site/inevanrobays/

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