1956. Disentangling oil price uncertainty
Invited abstract in session WA-7: Understanding and Measuring Risk: Macroeconomic and Financial Perspectives, stream Risk Management in Commodities and Financial Markets .
Wednesday, 8:30-10:00Room: Clarendon GR.01
Authors (first author is the speaker)
| 1. | Elena Diaz
|
| Universidad Pontificia Comillas | |
| 2. | Juncal Cuñado
|
| Universidad de Navarra | |
| 3. | Fernando Perez de Gracia
|
| Universidad de Navarra |
Abstract
This paper examines the macroeconomic impact of oil price uncertainty using a Factor-Augmented Proxy VAR (FPVAR) framework. We construct a dynamic factor model (DFM) to decompose daily implied volatility indexes—VIX, MOVE, and OVX—into a common uncertainty factor and an idiosyncratic oil uncertainty component. The proxy variable for oil uncertainty shocks is derived from the unexpected changes in the idiosyncratic oil uncertainty factor. Monthly macroeconomic data, including U.S. industrial production, inflation, interest rates, and real stock returns, are used to estimate the VAR. Our findings reveal that oil uncertainty shocks have significant effects on economic activity, particularly by lowering output and stock returns while increasing inflation and interest rates. A historical decomposition highlights the contribution of oil uncertainty shocks to past macroeconomic fluctuations. The results provide empirical support for using implied volatility measures to isolate oil uncertainty from price level changes and differentiate it from broader macroeconomic uncertainty.
Keywords
- OR in Energy
- Energy Policy and Planning
- Financial Modelling
Status: accepted
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