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An analysis of the global oil market using SVARMA models

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Raghavan, M ORCID: 0000-0002-4123-5004 2019 , An analysis of the global oil market using SVARMA models.

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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 mov-
ing average (SVARMA) model. The superior out-of-sample forecasting performance
of the reduced form VARMA compared to VAR alternatives advocates the suitabil-
ity 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 eco-
nomic activity, where the global activity responded positively and negatively during the
global economic expansion and contraction respectively, emphasising the precautionary
nature of the shock.

Item Type: Report (Discussion Paper)
Authors/Creators:Raghavan, M
Keywords: VARMA models, oil price shocks, global oil market, impulse responses, forecasting
Publisher: University of Tasmania
Copyright Information:

Copyright 2019 University of Tasmania

Additional Information:

JEL Classification numbers: C32, E32, Q43

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