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Identifying Oil Price Shocks and Their Consequences: Role of Expectations and Financial Factors in the Crude Oil Market

November 11, 2016
Takuji Fueki*1
Hiroka Higashi*2
Naoto Higashio*3
Jouchi Nakajima*4
Shinsuke Ohyama*5
Yoichiro Tamanyu*6


This paper proposes a simple but comprehensive structural vector autoregression (SVAR) model to examine the underlying factors of oil price dynamics by explicitly incorporating the role of expectations on future aggregate demand and oil supply as well as financial investors' role in the crude oil market. Our main findings are threefold. First, our empirical analysis shows that shocks on expectations and financial factors in the oil market explain more than 40 percent of historical oil price fluctuations. In particular, expected future oil supply shocks are more than twice as important as realized and expected aggregate demand shocks or financial factor shocks in accounting for the oil price developments. Second, focusing on a recent large drop in oil prices since 2014, the analysis reveals that expected future oil supply shocks were the dominant driver of oil price falls from January 2014 to January 2015, while expected and realized aggregate demand shocks played a major role in oil price falls from June 2015 to February 2016. Finally, we show that the influence of oil price shocks on global output varies by the nature of each shock.

JEL Classification
C32, E44, G12, G15

Oil demand and supply, Oil price, Financial factor, Structural vector autoregressive model

  1. *1International Department, Bank of Japan
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  2. *2International Department, Bank of Japan
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  3. *3International Department (currently Financial System and Bank Examination Department), Bank of Japan
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  4. *4International Department, Bank of Japan (currently Bank for International Settlements)
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  5. *5International Department, Bank of Japan
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  6. *6International Department, Bank of Japan (currently University of Oxford)
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