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On the influence of US monetary policy on crude oil price volatility

Alessandra Amendola (), Vincenzo Candila () and Antonio Scognamillo
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Vincenzo Candila: University of Salerno

Empirical Economics, 2017, vol. 52, issue 1, 155-178

Abstract: Abstract Forecasting oil prices is not straightforward, such that it is convenient to build a confidence interval around the forecasted prices. To this end, the principal ingredient for obtaining a reliable crude oil confidence interval is its volatility. Moreover, accurate crude oil volatility estimation has fundamental implications in terms of risk management, asset pricing and portfolio handling. Generally, current studies consider volatility models based on lagged crude oil price realizations and, at most, one additional macroeconomic variable as crude oil determinant. This paper aims to fill this gap, jointly considering not only traditional crude oil driving forces, such as the aggregate demand and oil supply, but also the monetary policy rate. Thus, this work aims to contribute to the debate concerning the potential impact of (lagged) US monetary policy as well as the other crude oil future price (COFP) determinants on daily COFP volatility. By means of the recently proposed generalized autoregressive conditional heteroskedasticity mixed data sampling model, different proxies of the US monetary policy alongside US industrial production (proxy of the US aggregate demand) and oil supply are included in the COFP volatility equation. Strong evidence that an expansionary (restrictive) variation in monetary policy anticipates a positive (negative) variation in COFP volatility is found. We also find that a negative (positive) variation of industrial production increases (decreases) COFP volatility. This means that volatility behaves counter-cyclically, according to the literature. Furthermore, the out-of-sample forecasting procedure shows that including these additional macroeconomic variables generally improves the forecasting performance.

Keywords: Volatility; GARCH-MIDAS; Forecasting; Crude oil (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 E30 Q43 (search for similar items in EconPapers)
Date: 2017
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Working Paper: On the influence of the U.S. monetary policy on the crude oil price volatility (2015) Downloads
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