Abstract
The paper postulates that enhanced informational efficiency and signal processing capacity, which have characterized the evolution of commodity markets’ architecture during the last two decades, have rendered commodity prices more robust with respect to external shocks. Our econometric analysis of times series over 2001–2015 revealed a persistent decline in the responsiveness of crude oil prices to inflows of information concerning potentially supply-disruptive events. International news on terrorist attacks involving damage to oil infrastructure including those occurring in proximity to oil extraction sites, political unrest, and conflicts of rivaling factions are all documented to exercise a decreasing impact on oil price volatility both over short and medium observation spans. The previously observed spikes in oil prices accompanying similar disruptive events in OPEC countries are also shown to flatten over time as price sensitivity to information shocks declines. The discovered weakening of market response becomes more pronounced from the mid-2000s, which corresponds to the period of rapid algorithmization of commodity trading.
Highlights
Oil Prices to News on PotentiallyThe growing co-integration and globalization of financial markets fueled by rapid advancements of information transfer technologies have amplified the spillover effects observed across all major asset classes causing uniform reactions to systemic shocks to quickly propagate globally [1]
We explore this conjecture by inquiring into intertemporal trends in the oil market’s reaction to potentially supply-disruptive events such as terrorist attacks and political unrest involving oil extraction/transportation/processing infrastructure
We argue that algorithmization of commodity trading coupled with markets’ improved ability to assess and quantify the consequences of any disruptive event for the supply of oil have contributed to the gradual reduction of oil price sensitivity to the occurrence of such events
Summary
Oil Prices to News on PotentiallyThe growing co-integration and globalization of financial markets fueled by rapid advancements of information transfer technologies have amplified the spillover effects observed across all major asset classes causing uniform reactions to systemic shocks to quickly propagate globally [1]. Increased informational efficiency combined with an overall better processing capability of the modern trading platforms should have supposedly contributed to a higher resilience of financial markets with respect to major shocks We explore this conjecture by inquiring into intertemporal trends in the oil market’s reaction to potentially supply-disruptive events such as terrorist attacks and political unrest involving oil extraction/transportation/processing infrastructure. We argue that algorithmization of commodity trading coupled with markets’ improved ability to assess and quantify the consequences of any disruptive event for the supply of oil have contributed to the gradual reduction of oil price sensitivity to the occurrence of such events We test this conjecture by analyzing the dynamics of daily oil prices in response to terrorist attacks/political instability during the period of 2001–2015. The study attempts to answer the following research questions: Disruptive
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