Charles Explorer logo
🇬🇧

How does the financial market update beliefs about the real economy? Evidence from the oil market

Publication at Faculty of Social Sciences, Faculty of Mathematics and Physics, Centre for Economic Research and Graduate Education |
2021

Abstract

Oil traders find it challenging to process all information and choose which sources to follow. Inventories represent a perfect source, as they provide important information regarding real agents' intertemporal decisions and can easily be observed in real time.

However, inventories do not contain full information about the state of the oil market. We show that financial traders fail to acquire additional information and treat inventories as a sufficient statistic.

As a result, the financial market fails to distinguish realized shocks from news shocks and treats all shocks as persistent. To confirm this hypothesis, we use oil inventory announcements to identify market inventory surprises; and we estimate a model of the joint dynamics of returns and return volatilities around announcements using high frequency data on oil futures contracts with short and long maturities.