Cyclical properties of supply-side and demand-side shocks in oil-based commodity markets

TL;DR

This paper investigates how supply and demand shocks in oil markets transmit information across different frequencies, revealing that short-term shocks and demand-side influences are increasingly significant in market dynamics.

Contribution

It introduces a novel frequency domain methodology to analyze the cyclical properties of shocks in oil markets, highlighting evolving importance of short-term and demand-side shocks.

Findings

Shocks shorter than one week are increasingly influential.

Demand-side shocks are becoming more important for short-term connectedness.

Supply-side shocks impact both long-term and short-term market dynamics.

Abstract

Oil markets profoundly influence world economies through determination of prices of energy and transports. Using novel methodology devised in frequency domain, we study the information transmission mechanisms in oil-based commodity markets. Taking crude oil as a supply-side benchmark and heating oil and gasoline as demand-side benchmarks, we document new stylized facts about cyclical properties of the transmission mechanism generated by volatility shocks with heterogeneous frequency responses. Our first key finding is that shocks to volatility with response shorter than one week are increasingly important to the transmission mechanism over the studied period. Second, demand-side shocks to volatility are becoming increasingly important in creating short-run connectedness. Third, the supply-side shocks to volatility resonating in both the long run and short run are important sources of connectedness.