The Role of Expectations in Commodity Price Dynamics and the Commodity Demand Elasticity: Evidence from Oil Data

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Abstract

This paper examines the contribution of expectations to the oil price dynamics. Classical competitive storage theory states that inventory decision considers both the current and future market condition, and interacts with the spot and expected future spot prices. I model an expectation shock explicitly along with the concurrent supply and demand shocks. This allows for the estimation of the underlying shock processes from the observed price and inventory data and the quantification of their contribution to the price/inventory dynamics respectively. The model is applied to the world crude oil market under assumed price elasticity of demand. The market expectations are estimated to contribute more to the crude oil spot price movements when the demand is assumed to be more inelastic. Thus, the model illustrates the importance of the price elasticity of demand in understanding the price dynamics
Original languageEnglish
PublisherUniversity of Aberdeen Business School
Number of pages56
Publication statusPublished - 6 Sep 2016

Publication series

NameDiscussion Paper in Economics
PublisherUniversity of Aberdeen
No.10
Volume16
ISSN (Electronic)0143‐4543

Keywords

  • crude oil spot price
  • crude oil supply
  • crude oil demand
  • crude oil inventory
  • expectation shock
  • dynamic equilibrium
  • state space model

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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    Jin, X. (2016). The Role of Expectations in Commodity Price Dynamics and the Commodity Demand Elasticity: Evidence from Oil Data. (Discussion Paper in Economics; Vol. 16, No. 10). University of Aberdeen Business School.