Structural Sources of Oil Market Volatility and Correlation Dynamics

This paper explores the structural driving sources of oil market volatility and correlation dynamics. Our results highlight a steadily declining oil production volatility and concurrent increasing real oil price volatility since the mid-1980s. We find that a decrease in the persistence of the real price of oil, changes in the variability of oil shocks, and a decrease in the short-run price elasticity of oil demand jointly account for this observed diverging pattern of oil volatilities. Our generalized time-varying-parameters SVAR model proves to be more adequate than traditional models for estimating oil market dynamics