News, Noise and Oil Price Swings

We interpret oil price fluctuations as a response to expectations about fundamentals (i.e. oil production). However, agents only receive a noisy signal about possible changes in future oil production. We find that a large part... [ view full abstract ]

We interpret oil price fluctuations as a response to expectations about fundamentals (i.e. oil production). However, agents only receive a noisy signal about possible changes in future oil production. We find that a large part of oil price swings is attributable to shocks that do not have any effect on oil production or global demand indexes. We interpret this shock, through the lenses of a simple imperfect information rational expectations framework, as a noise shock in the oil market. We use a VAR with dynamic rotations to measure their effects on the oil market and the real economy.