An Analysis of the Global Oil Market Using SVARMA Models

28 Pages Posted: 19 Mar 2019

Date Written: March 19, 2019

Abstract

The paper analyses the importance of supply versus demand shocks on the global oil market from 1974 to 2017, using a parsimonious structural vector autoregressive moving average (SVARMA) model. The superior out-of-sample forecasting performance of the reduced form VARMA compared to VAR alternatives advocates the suitability of this framework. We specifically account for the changes in the oil market over three distinctive sub-periods - pre moderation, great moderation and post moderation periods, to provide a means of identifying the changing nature of shock transmission mechanism across times. The findings shed some light on the effects of supply versus demand related oil shocks under different economic environment. Oil supply shocks explain large fraction of the movements in the global oil market in the pre and post moderation periods, i.e. during the slower economic growth periods. The importance of global activity shock on oil price movements is obvious during the 2003-2008 boom period. The oil specific shock has an interesting transmission path on the global economic activity, where the global activity responded positively and negatively during the global economic expansion and contraction respectively, emphasising the precautionary nature of the shock.

Keywords: VARMA models, Oil price shocks, Global oil market, Impulse responses, Forecasting

JEL Classification: C32, E32, Q43

Suggested Citation

Raghavan, Mala, An Analysis of the Global Oil Market Using SVARMA Models (March 19, 2019). CAMA Working Paper No. 25/2019. Available at SSRN: https://ssrn.com/abstract=3355030 or http://dx.doi.org/10.2139/ssrn.3355030

Mala Raghavan (Contact Author)

University of Tasmania ( email )

French Street
Sandy Bay
Tasmania, 7250
Australia

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