Monetary policy and oil volatility smirk

Yuan Tian, Junzhu Zhao and Fang Zhen

International Review of Financial Analysis, 2025, vol. 104, issue PB

Abstract: This paper investigates the transmission of U.S. monetary policy shocks to oil market dynamics, focusing on oil price uncertainty and tail risks. Using a structural VAR model, we reveal that tight monetary policy induces a sustained increase in oil market uncertainty while reducing left-tail risk, as hedgers exhibit diminished concern over extreme downside risks. In contrast, the impact on right-tail risk is statistically insignificant. Moreover, the effects of monetary policy shocks are asymmetric: while contractionary policies raise oil uncertainty and expansionary policies reduce it, tight monetary policies exert a stronger influence on left-tail risk, with pronounced disparities in the response of right-tail risk between tightening and loosening policies.

Keywords: Monetary policy; Oil volatility; Structural VAR; Asymmetric effects (search for similar items in EconPapers)
JEL-codes: C32 E52 Q43 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:104:y:2025:i:pb:s1057521925003874

DOI: 10.1016/j.irfa.2025.104300

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