Data Preface: Energy Investments: An adaptive approach to profiti...

On the question of oil price volatility, you may consider examining my new book - Energy Investments: An adaptive approach to profiting from uncertainties - published by Palgrave Macmillan.

You can take a look at Chapter 2 for a discussion on price and volume volatilities, energy transitions and how they impact volatilities. The link to financial sector development is less clear to me. A possible way of addressing the latter is to examine how energy options or financial instruments are developed to insure investors against the adverse effects of price or volume volatilities.

You can access pages of my book at www.amazon.co.uk by searching for ricardo g barcelona.

I am interested in what sort of relationship you think may exist between these two factors. While the volatility of oil price is easily measured in a particular currency, 'financial sector development' is not so readily quantified. Do you mean the total amount of money it turns over - per hour, day week etc, do you mean how many people it employs, do you mean how many organisations or entities are involved in it, do you have some other means of measuring it like the computational capacity involved in financial transactions around the world, the level of sophistication of software algorithms used in it - and so on. Once a clear idea of what the second factor means then surely you can start to relate it to the first factor. I would recommend however that you start your work by defining the second factor and rigorously justifying that definition. Best wishes with your research!

Hi Muritala,

As Tony mentioned, two things require definition in the topic you have chosen. One is the type of relationship & period of study. The second is specific definition of the term 'financial sector development' & how you propose to measure the same. Whether you want to study index volatility & oil price volatility or relate oil prices with macroeconomic factors as a measure of financial sector development needs to be defined clearly. Only then a suitable framework can be evolved.

I quite appreciate the contribution of Tony Maine and Hemlata Chelawat. to start with the definition of financial sector development and the proxies used in measuring it.

Financial development of a country according to Financial development Index, (2008) refers to such elements, policy making decisions and institutions that lead to an efficient financial markets and easy access to capital and financial service” Therefore, the financial sector development has a significant importance because it promotes the economic development in a country and well established financial system of a country has a significant importance for economic growth. A complete set of financial sector development indicators should cover credit intermediation, liquidity management, financial pricing mechanism, and risk management characteristics of the financial system. Basically, there are three proxies to measure financial sector development. These are: Quantity measures, Structural measures and financial measures.

A. Quantity Measures

Quantity indicators based on monetary and credit aggregates are the traditional measures of financial development and deepening. They are proxy measures of savings and credit intermediation in an economy and are expected to increase in response to improved price signaling, represented primarily by the establishment of positive real interest rates.

(1) Narrow money (in terms of GDP)

(2) Broad money (in terms of GDP) and

(3) Private sector credit (in terms of GDP)

B. Structural Measures

The measures are designed to analyze the structure of the financial system and determine the importance of its different elements. It can be measured by the ratio of broad money to narrow money (BM/NM). This ratio should be positively related to a country’s level of financial development;

C. Financial Prices

Developed financial systems should produce positive real interest rates that reflect peoples’ positive rate of time preference and growth opportunities in an economy. This is an outcome of both neoclassical growth models and of more recent financial sector endogenous growth models. It is also a key argument of financial sector protagonists, like McKinnon and Shaw. It is measured by the real deposit interest rate.

The study is basically is to establish a theoretical framework in order to examine the relationship between oil price volatility and financial sector development being that oil price volatility as one of the macroeconomic factors that influences financial sector development.

Thanks.