Uncertainty and Sign-Dependent Effects of Oil Market Shocks

47 Pages Posted: 5 Feb 2019

See all articles by Bao Nguyen

Bao Nguyen

School of Economics, University of Economics Ho Chi Minh City (UEH), Vietnam; Development Policy Centre, Crawford School of Public Policy, ANU; Centre for Applied Macroeconomic Analysis, ANU

Tatsuyoshi Okimoto

Crawford School of Public Policy, Australian National University

Trung Duc Tran

University of Melbourne - Department of Economics

Date Written: January 28, 2019

Abstract

This paper investigates the oil market reaction to its fundamental shocks: supply, aggregate demand and oil-specific demand in different regimes characterised by high versus low uncertainty in the market. We do so by first proposing a novel oil uncertainty index that is measured by the conditional volatility of the unpredictable component of oil prices. Then, we employ a nonlinear model to show that the structural oil market shocks have asymmetric effects. For instance, in relation to real economic activity, we find that both supply shocks and oil-specific demand shocks have negligible impacts in periods of low oil price uncertainty but sizeable effects in periods of high oil price uncertainty. Our model also enables us to evaluate the hypothesis that real economic activity responds asymmetrically to unexpected increases and decreases in oil prices driven by supply and specific demand shocks. We find that the effects of oil supply shocks are asymmetric but oil specific demand shocks are not, which indicates that the (a)symmetric oil market reaction depends on the underlying market shocks.

Keywords: oil price uncertainty, STVAR model, asymmetric effect

JEL Classification: C32, E32, Q4

Suggested Citation

Nguyen, Bao and Okimoto, Tatsuyoshi and Tran, Trung Duc, Uncertainty and Sign-Dependent Effects of Oil Market Shocks (January 28, 2019). CAMA Working Paper No. 10/2019, Available at SSRN: https://ssrn.com/abstract=3328292 or http://dx.doi.org/10.2139/ssrn.3328292

Bao Nguyen (Contact Author)

School of Economics, University of Economics Ho Chi Minh City (UEH), Vietnam; Development Policy Centre, Crawford School of Public Policy, ANU; Centre for Applied Macroeconomic Analysis, ANU ( email )

Tatsuyoshi Okimoto

Crawford School of Public Policy, Australian National University ( email )

132 Lennox Crossing, ANU
Acton, Australian Capital Territory 2601
Australia

Trung Duc Tran

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
28
Abstract Views
893
PlumX Metrics