Do Scheduled Macroeconomic Announcements Influence Energy Price Jumps?

• DOI: http://doi.org/10.1002/fut.21796
• Published date: 01 January 2017
• Date: 01 January 2017

Do Scheduled Macroeconomic

Announcements Influence Energy

Price Jumps?

Kam Fong Chan* and Philip Gray

For six important energy futures markets, this study examines whetherlarge price movements (i.e.,

jumps) are related to the arrival and information content of scheduled macroeconomic

announcements. Since prior studies by Kilian and Vega [(2011) Review of Economics and

Statistics, 93, 660–671]and Chatrath, Miao, and Ramchander [(2012) Journal of Futures Markets,

32, 536–559] find little evidence of an announcement-price reaction in mean energy returns, we

focus on jump dynamics as a possible conduit for macroeconomic announcements to influence the

distribution of returns. We find little evidence of an increase in jump arrival rates coinciding with

scheduled releases of economic data. Similarly, there is no compelling evidence that the magnitude

and/orsign (“good”vs. “bad”) of the inherent announcement surprises influence the mean jump size.

© 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:71–89, 2017

1. INTRODUCTION

Financial economists have long studied how information affects asset prices and volatility.

Scheduled releases of macroeconomic data provide a natural setting to study the impact of

new information on asset prices. Not only is the data potentially relevant to a wide variety of

assets, but the regular announcements are eagerly anticipated and receive broad media

coverage. For these reasons, a burgeoning literature has emerged studying the influence of

macroeconomic announcements on price dynamics. The markets examined span traditional

financial assets (equities, Treasury bonds, and exchange rates), commodities (e.g., precious

metals) and, more recently, energy.

Whether macroeconomic data should affect energy prices has been the subject of

significant debate. By and large, the discussion has focused on the relationship between oil

and the macro economy. One school of thought views oil prices as predetermined with

respect to macroeconomic aggregate outputs (Barsky & Kilian, 2004). Alternatively, oil and

similar energy products can be regarded as assets. If so, Kilian and Vega (2011, p. 660)

conjecture that prices may respond like traditional financial assets to macroeconomic news

that reflects future supply and demand. Using a theoretical model, Frankel (2008)

Kam Fong Chan is at University of Queensland Business School, The University of Queensland, St Lucia,

Queensland, Australia. Philip Gray is at Department of Banking and Finance, Monash University, Monash

Business School, Melbourne, Victoria, Australia. We are grateful to an anonymous referee and Robert Webb

(the Editor) for many insightful comments.

JEL Classification: C5, E6, G1, Q4

*Correspondence author, University of Queensland Business School, The University of Queensland, St Lucia,

Queensland, Australia, Room 328A, Colin Clark Building, Blair Drive, St Lucia, QLD 4072, Australia. Tel: þ61-7-

3346-8002, Fax: þ61-7-3346-8166, e-mail: k.chan@business.uq.edu.au

Received May 2015; Accepted May 2016

The Journal of Futures Markets, Vol. 37, No. 1, 71–89 (2017)

© 2016 Wiley Periodicals, Inc.

Published online 3 June 2016 in Wiley Online Library (wileyonlinelibrary.com).

DOI: 10.1002/fut.21796

demonstrates why monetary policy should be an important determinant of commodity

(especially oil) prices.

1

Alquist, Kilian, and Vigfusson (2013) also suggest several reasons why

the price of energy in general (and oil in particular) is likely to respond to macroeconomic

aggregates. On the whole, Barsky and Kilian (2004, p.130) suggest that “mainstream

economists have been slow to embrace the notion that oil prices respond to economic forces,

as one would expect of other industrial commodity prices.”

Somewhat surprisingly, the empirical evidence that scheduled macroeconomic

announcements influence commodity and energy prices is mixed at best. Roache and Rossi

(2010) document that commodity prices (including precious metals, oil/gas, and agricultural

produce) are largely insensitive to macroeconomic announcements. In contrast, Christie-

David, Chaudhry, and Koch (2000) and Cai, Cheung, and Wong (2001) find that gold and

silver prices react to the release of unemployment reports and the consumer price index.

Kilian and Vega (2011) study the reaction of daily oil and gasoline prices to the release of

thirty different U.S. macroeconomic announcements. Their findings are striking by the total

absence of feedback from announcements to prices. Chatrath, Miao, and Ramchander

(2012) conjecture that the price response to announcements is likely to be influenced by the

state of oil inventory levels. They extend Kilian and Vega (2011) by conditioning the

announcement-price interaction on oil inventory levels. Alas, they find no important role for

inventory levels in the daily oil price response to macroeconomics announcements and

conclude that their study supports the “no relationship”finding of Kilian and Vega (2011).

Elder, Miao, and Ramchander (2013) take a different approach by studying high-

frequency oil returns. They document a strong correspondence between crude oil price

jumps over five-minute intervals and the release of economic information. Similarly, Basistha

and Kurov (2015) show that monetary policy surprises impact intraday oil prices. Moving

beyond energy markets, a number of other studies involving high-frequency data document

an announcement-price jump link.

2

While the recent findings of Elder et al. (2013) and Basistha and Kurov (2015) using

high-frequency data are intuitive and encouraging, the inability to empirically identify a link

between economic announcements and energy prices at lower frequencies is troublesome. At

the heart of the issue is whether the initial price reaction in the minutes following an

announcement is permanent or transitory. Discussing the intraday versus daily dilemma,

Brazys and Martens (2014, p. 5) suggest that economic news can only be regarded as

important if the effect of the reaction remains at the end of the day. Kilian and Vega (2011)

express the same sentiment, justifying their modeling of daily energy price changes by a desire

to permit news to have a permanent effect. They note that “any response by the price of oil

within a few minutes or hours should be reflected in the daily return by construction”(p.

669). Importantly, Kilian and Vega (2011) show that, over the same sample period, the same

set of macroeconomic announcements are statistically related to daily asset returns on

traditional financial assets (i.e., Treasury bonds and foreign exchange). As such, they dismiss

the notion that the absence of a linkage between economic news and oil price is attributable

to lack of statistical power with daily analysis.

1

High interest rates reduce demand and/or increase supply of storable commodities through a variety of channels: (i)

increase the incentive for extraction sooner rather than later, (ii) decrease firm’s willingness to carry inventories, and

(iii) prompt speculators to move out of commodities and into fixed-income securities. In turn, uncertainty over future

interest rates itself may be a function of macroeconomic variables associated with monetary policy decisions and

future economic growth (Engle & Rangel, 2008).

2

Recent examples in conventional financial markets include Lahaye, Laurent, and Neely (2011) and Miao,

Ramchander, and Zumwalt (2014) who study equities, Treasury bonds and foreign exchange. Beber and Brandt

(2010), Rangel (2011), and Leon and Sebestyen (2012) also establish an announcement-price jump relationship

across different financial markets at daily frequency.

72 Chan and Gray