Formation of Market Beliefs in the Oil Market

Abstract

ISBN 978-80-7343-426-7 (Univerzita Karlova, Centrum pro ekonomický výzkum a doktorské studium) ISBN 978-80-7344-469-3 (Národohospodářský ústav AV ČR, v. v. i.) AbstractWe characterize formation of market beliefs in the oil market by providing a complete characterization of the market reaction to oil inventory surprises. We utilize the unique sequential nature of inventory announcements to identify inventory shocks. We estimate an AR-ARCH-MEM model of the joint dynamics of returns, return volatilities and trading volumes around the announcements using high frequency data on oil futures contracts. Our model (i) handles illiquidity of long maturity contracts by accounting for trading inactivity, (ii) captures time varying trading intensity, and (iii) allows for structural changes in the dynamics and responses to news over time. We show (i) uniform formation of expectations across oil futures contracts with different maturities, (ii) a strong negative relation between inventories surprises and re-turns, (iii) no effect on the term premium, which suggests that inventory shocks are always considered to be permanent, and (iv) di_erentiation in the reaction of volume by maturity. We demonstrate how our results can be used to test theories of oil price determination and contribute to the debate on the recent oil glut.

Does Index Arbitrage Distort the Market Reaction to Shocks?

“…The coecients are signicant in the 2014-16 period, although lacking signicance in the earlier years. The lack of signicance can be due to the lack of a strong eect of oil inventory announcements on oil prices, especially over the 2012-13 period as we document in Anatolyev et al (2018). When the oil price responses to news are small, the signal-to-noise ratio decreases and our estimates of oil betas are likely to become less precise.…”

“…In the second step, we identify fundamental shocks and measure stock market sensitivity to these shocks. We follow on our previous research, Anatolyev et al (2018), and use oil inventory announcements to identify fundamental oil shocks.…”

Market inefficiencies surrounding energy announcements

“…This methodology has been employed in different contexts to assess the relative importance of multiple variables (Grömping, 2006;Johnson & Lebreton, 2004;Thomas et al, 2017). To the best of our knowledge, the only prior study that uses combination forecasts to compute oil inventory surprises is Anatolyev et al (2018). Our approach differs from theirs in that we do not impose any assumptions in allocating forecast weights.…”

“…These studies provide evidence that combination forecasts deliver substantial gains in forecasting accuracy. To the best of our knowledge, the only prior study that uses combination forecasts to compute oil inventory surprises is Anatolyev et al (2018). By using the relative importance method, we do not need to impose any assumptions in allocating forecast weights.…”