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Analysis of real oil prices via trend-cycle decomposition

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  • Özbek, Levent
  • Özlale, Ümit

Abstract

The recent fluctuations in the oil prices have intensified the discussion on the dynamics and causes of real oil price changes. While the long-run component of real oil prices seems to have a stochastic trend, global real economic activity has been thought to generate important changes in real oil prices. Based on this argument, in this paper, we analyze the real oil prices within a trend-cycle decomposition framework, where we impose a stochastic trend and assume the cyclical term to be affected by global economic conditions. We also let the parameters vary over time to see whether shocks to trend and the cycle have changing effects on the real oil prices. As a result, we find that shocks to trend are more persistent recently. In that sense, this paper contributes to the literature by offering an explanation for the increased volatility in oil prices. In addition, we show that global economic activity contributed also to the previous oil price shocks, which were regarded mainly as supply-side driven.

Suggested Citation

  • Özbek, Levent & Özlale, Ümit, 2010. "Analysis of real oil prices via trend-cycle decomposition," Energy Policy, Elsevier, vol. 38(7), pages 3676-3683, July.
    • Handle: RePEc:eee:enepol:v:38:y:2010:i:7:p:3676-3683
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    Cited by:

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    2. Huang, Shupei & An, Haizhong & Wen, Shaobo & An, Feng, 2017. "Revisiting driving factors of oil price shocks across time scales," Energy, Elsevier, vol. 139(C), pages 617-629.
    3. Akdoğan, Kurmaş, 2020. "Fundamentals versus speculation in oil market: The role of asymmetries in price adjustment?," Resources Policy, Elsevier, vol. 67(C).
    4. Zhao, Zhen-yu & Zhu, Jiang & Xia, Bo, 2016. "Multi-fractal fluctuation features of thermal power coal price in China," Energy, Elsevier, vol. 117(P1), pages 10-18.
    5. Jakobsson, Kristofer & Söderbergh, Bengt & Snowden, Simon & Li, Chuan-Zhong & Aleklett, Kjell, 2012. "Oil exploration and perceptions of scarcity: The fallacy of early success," Energy Economics, Elsevier, vol. 34(4), pages 1226-1233.

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