Sources of volatility during four oil price crashes

Abstract

Previous sharp oil price declines have been accompanied by elevated ex-post volatility. In contrast, volatility was much less elevated during the oil price crash in 2014/15. We provide evidence that oil prices declined in a relatively measured manner during 2014/15, with a dispersion of price changes that was considerably smaller than comparable oil price declines. This finding is robust to using both descriptive and GARCH measures of volatility. Further, the US dollar appreciation exerted a strong influence on volatility during the recent crash; in contrast, the impact of equity market shocks was muted.

KEYWORDS:

• Crude oil price
• volatility
• oil price crashes
• commodity markets

JEL CLASSIFICATION:

• Q43
• Q47
• E39

Notes

¹ The reasons behind the oil price plunge have been discussed elsewhere (e.g., Arezki and Blanchard 2014; Baffes et al. 2015).

² The ex-post measures of volatility used here are different from ex-ante volatility implied by option prices – which measure market expectations of volatility before it is realized.

³ We also estimated the model for the post-2000 period using the Brent benchmark and the MSCI world equity index; the results were substantively similar for the comparable period.

⁴ Mean volatility (estimated using the GARCH specification) for each crash period is similar for sample windows of different sizes.

⁵ Volatility exhibited an upward trend after the 2014/15 crash ended (see Fig. 2).