How does the financial market update beliefs about the real economy? Evidence from the oil market
42 Pages Posted: 23 Jul 2018 Last revised: 29 Apr 2020
Date Written: April 15, 2020
Oil traders find it challenging to process all information and choose which sources to follow.
Inventories represent a perfect source, as they provide important information regarding real
agents’ intertemporal decisions and can easily be observed in real time. However, inventories
do not contain full information about the state of the oil market. We show that financial
traders fail to acquire additional information and treat inventories as a sufficient statistic. As
a result, the financial market fails to distinguish realized shocks from news shocks, and treats
all shocks as persistent. To confirm this hypothesis, we use oil inventory announcements
to identify market inventory surprises; and we estimate a model of the joint dynamics of
returns and return volatilities around announcements using high frequency data on oil futures
contracts with short and long maturities.
Keywords: oil market, ultra high frequency data, futures returns, inventory surprises, term structure curve, theory of storage
JEL Classification: C22, C32, C58, G12, G13
Suggested Citation: Suggested Citation