Research On The International Oil Price Volatility From The Financial Perspective

In recent years, the crude oil price in international market has been moving up and down constantly and abruptly. Being one of the most important industrial raw materials and energy products, oil is tied up to almost all economic sectors, the volatility of crude oil price brings huge uncertainty to the production and consumption of oil; the volatility and uncertainty, magnified through international trade, has negative effects on world economic stability and growth, such as world wide inflation and economy depression. Therefore, it is critical to study and explore the underlying reasons behind the oil price volatility.The fact that oil has characteristics like rarity, strategical importance, disparity of supply and demand, low price elasticity of demand, means oil price is very likely to be volatile. The change of oil reserve-production ratio, the fluctuation of stockpile, the strong demand of oil consumption, the weak balance between supply and demand, the production reduction from OPEC countries, as well as regional political affairs, are all reasons behind oil price volatility; however these factors pale against the way oil price changes. Multiple facts have pointed to financial factors like USD exchange rate changes, overly play of investment funds as the main reason that drives up oil price change in recent years. With the rapid development of financial derivatives like international oil option, futures and swap, the interaction of these oil related financial markets, the oil economy system has become a highly sophisticated financial system. The oil production security system has become a" trade-finance" type of price security system, from the "production-supply" type of supply security system in the old days.To uncover the mystery behind the international oil price volatility mechanism, this paper is structured around the following analysis framework,"inherent mechanism-mathematical model-econometric testing", mostly from a financial perspective.The early stage of oil spot market brought large risk for the oil production industry; both the supply and demand need some sort of market regulations or trade rules to secure the cost and profit of oil products. Under such circumstances, oil futures market is born, from then on, oil products began to have its financial characteristics. The participants of oil futures market take part in determining the oil price through their own expectation of oil market price, because there is price disparity, these market participants can make profits through constantly buying and selling oil futures contracts. Therefore, a large number of oil companies, hedge funds, investment banks, institutional investors, private equity funds and other financial capital were involved in financial oil markets. In recent years, the depreciation of USD has caused the foreign reserves of these countries that mainly hold USD valued assets to depreciate. In order to preserve the foreign reserve value, avoid the loss of foreign asset buying power, stabilize domestic oil production and consumption, countries throughout the world begin to move some of their foreign assets to oil reserves, that is, assets that are held by foreign sovereign countries start to participate in oil financial market. On the other hand, in order to compete in the international energy market, enterprises of these oil consumption countries need oil bank, oil fund to provide insurance and fund to help realize these countries'oil supply security strategic target, which further strengthens the financial characteristic of oil market. As of now, the oil financial derivatives almost cover all aspects of financial derivative market. From the scale of trade, the complexity of trade, the diversity of tools, the width of market participants, oil financial derivatives is closely tied with international crude oil market, capital market, financial market.Through studying the impact of financial factors on oil price volatility, we find that:under the floating exchange rate system," Triffin Dilemma " means the uncertainty of USD exchange rate; given that oil is currently priced by USD, there is a large amount of "oil dollar" around the world, which on one hand, further strengthens USD exchange rate volatility, and on the other hand, makes oil price speculation even worse. The USD exchange rate volatility has systematic effects on oil price; it not only affects the oil price directly, but also indirectly through affecting oil supply and demand, speculation. Oil speculation fund is one of the main reasons behind the oil price volatility; the richness of financial derivatives makes the situation even more dynamic. The interplays of factors like," Triffin Dilemma ", the fight over what currency oil should be priced on, oil dollar, oil financial derivatives, oil speculation fund, USD exchange rate, have made the oil price trajectory in recent years derailed from the traditional supply and demand balance rule, displaying constant and volatile change.Through constructing a simple DSGE model and a complex DSGE model including oil consumers department and oil producers department, this paper introduces productivity shock, oil consumption demand shock and oil speculation demand shock. Firstly, this paper puts forward the first order conditions and the logarithmic linearization, then gives the parameter calibration, lastly obtains impulse response results of the model variables including the international oil futures price from various random shocks using the DYNARE and MATLAB program. Analysis results indicate:Oil speculation demand exogenous shock plays a biggest role to oil price in the short term; there is deviation of1.2%from the steady state in the first period, and oil price will return to the steady quickly in the fifth period. Productivity exogenous shock plays a smallest role to oil price in the short term; there is deviation of0.17%from the steady state in the first period, and oil price will restore the steady after40periods. Oil consumption demand shock plays a moderate role to oil price in the short term; there is deviation of0.3%from the steady state in the first period, and most deviation will get0.4%in later period; oil price can not restore the steady in the fortieth periods, and there is still deviation of0.2%then. Through the DSGE model analysis and simulation, we can confirm the conclusion of theoretical analysis that oil financial factors in recent years have a more decisive effect on international oil futures price volatility in contrast to oil supply and demand factors.By using many kinds of econometric methods such as ADF unit root testing, two stage EG, Johansen cointegration testing, Granger causality testing, VEC model, impulse response, variance decomposition, GS model, EC-EGARCH model with double variables etc, this paper analyzes price discovery function of international oil futures market, volatility spillover effect, relationship between speculation and oil futures price, relationship between USD exchange rate and oil futures price, relationship among financial factors, the supply-demand factors and oil futures price. The results indicate:(1) International oil futures market runs effectively and plays the dominant role in the process of price discovery; price discovery function of oil futures market provides favorable conditions for oil hedging, risk aversion, and volatility spillover. The returns in futures market and in spot market are both steady sequences and have "higher peak and fat tail" features,"clustering" features, and "lever effect"; volatility spillover is asymmetrical and overflow direction is from the futures market to the spot market so that futures price volatility has led the spot price to the same trend and law.(2) The speculative factors represented with the total positions and the proportion of non commercial trading positions have a significant influence on international oil futures price in the short term; There is a cointegration relationship among oil futures price, the proportion of non commercial trading positions, American commercial oil stock, and American oil consumption; the cointegration equation indicates that the proportion of non commercial trading positions has a far greater influence on oil price than American commercial oil stock and American oil consumption. In other words, oil speculation dominates oil futures price volatility trend compared with supply-demand factors.(3) Generalized dollar index have a significant influence on international oil futures price. There is a cointegration relationship among oil futures price, generalized dollar index, the proportion of non commercial trading positions, American crude oil supply, and American crude oil consumption; the cointegration equation indicates that generalized dollar index and the proportion of non commercial trading positions have a bigger influence on futures oil price, and American crude oil consumption has a smaller influence, and American crude oil supply has no significant influence.(4) In contrast to the analysis results in the short term, oil consumption has an enhanced influence on oil futures price and oil speculation has a weakened influence in the long term; USD exchange rate has a long-term reverse effect on oil futures price.In order to cope with negative effect of the international oil price volatility on world economy caused by the financial factors, we need take measures to regulate the overly active speculation by oil investment funds, revamp international currency system. For China, we should build a multi-layer oil trade market, set up oil bank and investment funds, build oil foreign currency reserve, continue to push RMB valued oil trade, improve the oil strategic reserve system, strengthen oil financial legislation, establish risk supervision mechanism of the oil finance.This paper is structured around the following analysis framework,"inherent mechanism-mathematical model-econometric testing", and explains the movement of international oil price from three aspects including theoretical, modeling and empirical analysis. DSGE model is first ever used in explaining the impact of financial factors on the oil price volatility, which is a new try. In addition, research perspective has certain innovation:Supply and demand factors are the fundamental reasons behind the price movement, therefore we always put them into consideration when analyzing the effect of financial factors; before analyzing financial factors impact, we study the functions of international oil future market first and come to the conclusion that future market is indeed effective; this creates foundation for the subsequent positive analysis; analyzing the financial effect both short term and long term could also make the conclusion more convincing and objective.