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The Impact of Global Energy Price Volatility on Oil Derivative and Local Price in Jordan: Using DCC-GARCH Model

Author

Listed:
  • Radi Mohammad Adailah

    (College of Business, Mutah University, Jordan)

  • Saba Bassam Al-Damour

    (College of Business, Mutah University, Jordan)

  • Ahmad Al-Majali

    (College of Business, Mutah University, Jordan)

Abstract

The central aim of this study is to evaluate the repercussions of global energy price fluctuations on the pricing of local oil derivatives in Jordan, and their subsequent impact on domestic price levels. This research seeks to propose risk mitigation strategies to address the challenges posed by energy price volatility, offering valuable insights for Jordanian policymakers. Given the dearth of understanding among policymakers and industry stakeholders regarding the economic ramifications of global energy prices on local markets, this study posits a statistically significant relationship, at a 5% significance level, between global energy prices, local oil derivative prices, and the prices of commodities and services. To investigate these dynamics, the study employs a DCC-GARCH (Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity) model, utilizing monthly data spanning from Jan:2008 to Mar:2022, encompassing global energy prices, local energy prices, and the consumer price index. The study's findings reveal that fluctuations in global oil prices, specifically the Brent benchmark, have a discernible impact on local oil derivative prices in Jordan. However, the reverse causal relationship is not supported, indicating a unidirectional link from oil prices to oil derivatives. The estimated DCC-GARCH model further quantifies this connection, demonstrating that a 1% increase in Brent oil prices corresponds to a 0.21% increase in local oil derivative prices within Jordan. Moreover, a 1% uptick in local oil derivative prices corresponds to a 0.23% increase in the consumer price index. Based on these research outcomes, it is strongly recommended that measures be explored to effectively manage the volatility of oil derivative prices in Jordan. The implementation of such measures holds the potential to bolster local price stability and foster a more resilient economic environment.

Suggested Citation

  • Radi Mohammad Adailah & Saba Bassam Al-Damour & Ahmad Al-Majali, 2024. "The Impact of Global Energy Price Volatility on Oil Derivative and Local Price in Jordan: Using DCC-GARCH Model," International Journal of Energy Economics and Policy, Econjournals, vol. 14(1), pages 336-348, January.
    • Handle: RePEc:eco:journ2:2024-01-35
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    References listed on IDEAS

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    More about this item

    Keywords

    Oil; Price Fluctuations; Energy; Jordan; Oil Derivatives;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law

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