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Dynamic responses of energy prices to oil price shocks

Tom W. Miller (Department of Economics, Finance, and Quantitative Analysis, Kennesaw State University, Kennesaw, Georgia, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 15 September 2022

Issue publication date: 26 January 2023

118

Abstract

Purpose

This study examines the dynamic responses of five different daily energy prices to a pulse shock affecting the daily price of oil.

Design/methodology/approach

Daily data for energy prices from the Federal Reserve Economic Data (FRED) database for January 7, 1997, through February 8, 2021, are analyzed. A bivariate structural vector error correction model and generalized autoregressive conditionally heteroscedastic model are combined and extended by adding the volatility of the growth rate of daily oil prices as an explanatory variable for the growth rates of energy prices. This model is estimated and used to generate impulse responses for energy prices.

Findings

The empirical results show that the levels of the daily energy prices examined have unit roots, are integrated of order one, are cointegrated, and generally revert slowly to their long-term equilibrium relationships with the price of oil. The growth rates for the daily energy prices have autoregressive conditional heteroscedasticity, generally are positively related to the volatility of daily oil prices, respond quickly to a pulse shock to daily oil prices, and have cumulative responses that last at least one month.

Originality/value

This paper allows for simultaneous estimation of extended bivariate structural vector error correction and generalized autoregressive conditionally heteroscedastic models that include the volatility of oil as an explanatory variable and uses these models to generated cumulative impulse responses for the growth rates of daily energy prices to oil price shocks.

Keywords

Citation

Miller, T.W. (2023), "Dynamic responses of energy prices to oil price shocks", Managerial Finance, Vol. 49 No. 2, pp. 357-377. https://doi.org/10.1108/MF-07-2021-0321

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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