Measuring Oil-Price Shocks Using Market-Based Information

We study the effects of oil-price shocks on the U.S. economy combining narrative and quantitative approaches. After examining daily oil-related events since 1984, we classify them into various event types. We then develop measures of exogenous shocks that avoid endogeneity and predictability concerns. Estimation results indicate that oil-price shocks have had substantial and statistically significant effects during the last 25 years. In contrast, traditional VAR approaches imply much weaker and insignificant effects for the same period. This discrepancy stems from the inability of VARs to separate exogenous oil-supply shocks from endogenous oil-price fluctuations driven by changes in oil demand.Commodity price fluctuations;External shocks;Oil prices;Price increases;oil shocks, oil market, opec, equation, oil demand, forecasting, oil production, crude oil, oil shock, oil futures, oil inventory, correlation, granger causality, oil exporters, predictability, statistics, equations, oil supply, econometric analysis, econometrics, oil and gas, confidence intervals, oil field, spot price, statistical significance, higher oil prices, correlations, energy information administration, oil price changes, time series, oil & gas, statistical tests, significance level, oil producers, dummy variable, random walk, samples, bootstrap, crude oil market, natural gas, economic perspectives, standard deviations, oil-producing countries, petroleum reserves, oil supplies, simultaneous equation, survey, oil markets, crude oil prices, oil industry, time series analysis, covariance, extrapolation, world oil production, logarithm, polynomials, crude oil futures, crude oil price, economic theory, oil traders, vector autoregression