Premium
DISENTANGLING DEMAND AND SUPPLY SHOCKS IN THE CRUDE OIL MARKET: HOW TO CHECK SIGN RESTRICTIONS IN STRUCTURAL VARS
Author(s) -
Lütkepohl Helmut,
NetŠunajev Aleksei
Publication year - 2013
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2330
Subject(s) - economics , sign (mathematics) , econometrics , autoregressive model , volatility (finance) , crude oil , oil price , vector autoregression , markov chain , structural vector autoregression , supply and demand , aggregate demand , monetary economics , macroeconomics , monetary policy , computer science , mathematical analysis , mathematics , petroleum engineering , engineering , machine learning
SUMMARY Sign restrictions have become increasingly popular for identifying shocks in structural vector autoregressive (SVAR) models. So far there are no techniques for validating the shocks identified via such restrictions. Although in an ideal setting the sign restrictions specify shocks of interest, sign restrictions may be invalidated by measurement errors, data adjustments or omitted variables. We model changes in the volatility of the shocks via a Markov switching (MS) mechanism and use this device to give the data a chance to object to sign restrictions. The approach is illustrated by considering a small model for the market of crude oil. Earlier findings that oil supply shocks explain only a very small fraction of movements in the price of oil are confirmed and it is found that the importance of aggregate demand shocks for oil price movements has declined since the mid 1980s. Copyright © 2013 John Wiley & Sons, Ltd.