The Simple Economics of Global Fuel Consumption  [PDF] 
(joint with Doga Bilgin)

Abstract: The paper explores the role of fuel demand in the global market for oil. We introduce a simple supply and demand framework that clarifies the role of price elasticities and expectations in the price formation in markets for storable commodities. We then quantify the relationship between global fuel consumption and crude oil prices. Our results provide novel estimates of the global fuel demand elasticity, which indicate that global fuel demand is very inelastic with respect to crude oil prices in the short run. We estimate that over the last three decades, shifts in global fuel demand accounted for more than half of the variation in global crude oil prices. Our results are particularly important for understanding the evolution of quantities in the global oil market.

On the Tail Risk Premium in the Oil Market  [PDF] 

Abstract: This paper shows that changes in market participants’ fear of rare events implied by crude oil options contribute to oil price volatility and oil return predictability. Using 25 years of historical data, we document economically large tail risk premia that vary substantially over time and significantly forecast crude oil futures and spot returns. Oil futures prices increase (decrease) in the presence of upside (downside) fears in order to allow for smaller (larger) returns thereafter. This increase (decrease) is amplified for the spot price because of time varying-benefits from holding physical oil inventories that work in the same direction. We also provide support for view that that time variation in the relative importance of oil demand and supply shocks is an important determinant of oil price fluctuations and their interaction with aggregate outcomes. However, the option-implied tail risk premia are not spanned by traditional macroeconomic and oil market uncertainty measures, suggesting that time-varying oil price fears are an additional source of oil price volatility and predictability.

Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol? [PDF]

AbstractIt is commonly believed that the response of the price of corn ethanol (and hence of the price of corn) to shifts in biofuel policies operates in part through market expectations and shifts in storage demand, yet to date it has proved difficult to measure these expectations and to empirically evaluate this view. We quantify the extent to which price changes were anticipated by the market, the extent to which they were unanticipated, and how the risk premium in these markets has evolved. We show that the Renewable Fuel Standard (RFS) increased ethanol price expectations by as much $1.50 initially, raising ethanol storage demand starting and causing an increase in the price of ethanol. There is no conclusive evidence that the tightening of the RFS in 2008 shifted market expectations, but our analysis suggests that policy uncertainty about how to deal with the blend wall raised the risk premium in the ethanol futures market in mid-2013 by as much as 50 cents at longer horizons. Finally, we present evidence against a tight link from ethanol price expectations to corn price expectations and hence to the storage demand for corn in 2005-06.

Commodity Index Investment and the Comovement of Commodity and Stock Prices [PDF]

Abstract:  This paper relates the comovement of stock and commodity prices to increased participation of financial investors in commodity future markets. I present a partial equilibrium model in which demand for futures by financial investors transmit stock market shocks into commodity prices via a time varying risk premium. Based on data from the Commodity Trading Futures Commission on futures positions of different market participants, I introduce a framework for the empirical evaluation of my model. The results suggest that commodity index investors react systematically to negative stock market shocks by reducing their commodity risk exposure. This increases the risk premium for commercial producers, and thereby transmits them into commodity prices. The empirical evidence is consistent with my theoretical model, and helps to explaind the increased comovement of stock and commodity returns particularly in times of market distress.

Current Projects:

Measuring the Impact of Oil Price Shocks on Financial Variables
(joint with Ron Alquist and Jianjian Jin)

What Caused the 2014-2015 Oil Price Drop? Evidence from Global Fuel Consumption
(joint with Doga Bilgin, Bahattin Buyuksahin, Kun Mo and Konrad Zmitrowicz) 

Structural Oil Price Shocks and Commodity Currency Trader Positions
(joint with Ron Alquist and Bahattin Buyuksahin) 


Factors Behind the 2014 Oil Price Decline 
(joint with Benjamin Sawatzky and Konrad Zmitrowicz

A Dynamic Factor Model for Commodity Prices 
(joint with Doga Bilgin)

Low for Longer? Why the Global Oil Market in 2014 Is Not Like 1986  [Bank of Canada Staff Analytical Note 2016-11]
(joint with Bahattin Buyuksahin, Kun Mo and Konrad Zmitrowicz)

Essays in Applied Econometrics and Finance