OPEC news announcements: Effects on oil price expectation and volatility

Abstract

Several times a year, OPEC hosts conferences among its members to agree on further oil production policies. Prior to OPEC conferences, there is usually rampant speculation about which decision concerning world oil production levels (no change, increase, or cut) will be announced. The purpose of our investigation is to assess the impact of OPEC announcements on expectation and volatility of daily oil price changes (returns). We modify dummy variables indicating the day of an OPEC announcement to reflect a certain pattern of impact on return expectation and volatility. A combination of regression and GARCH models can then differentiate between pre- and post-announcement effects, and distinguish between the three kinds of OPEC decisions. We find evidence for a post-announcement effect on expectation, which is negative in the case of a cut decision and positive in case of an increase or maintain decision, while there is a positive pre-announcement effect on volatility, which is strongest in the case of a cut decision. (C) 2012 Elsevier B.V. All rights reserved.