Effect of Rare Disaster Risks on Crude Oil: Evidence from El Nino from Over 140 Years of Data

Riza Demirer, Rangan Gupta, Jacobus Nel () and Christian Pierdzioch
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Jacobus Nel: Department of Economics, University of Pretoria, Pretoria, 0002, South Africa

No 2020104, Working Papers from University of Pretoria, Department of Economics

Abstract: We extend the literature on the effect of rare disaster risks on commodities by examining the effect of the El Nino- Southern Oscillation (ENSO) on crude oil via the recently developed k-th order nonparametric causality-in-quantiles framework, utilizing a long range historical data set spanning the period 1876:01 to 2020:10. The methodology allows us to test for the predictive role of ENSO over the entire conditional distribution of not only real oil returns but also its volatility, by controlling for misspecification due to uncaptured nonlinearity and regime-changes. Empirical findings show that the Southern Oscillation Index (SOI), measuring the ENSO cycle, not only predicts real oil returns, but also volatility, over the entirety of the respective conditional distributions. The findings highlight the role of rare disaster risks over not only financial markets, but also commodities with significant implications for policymakers and investors.

Keywords: El Nino-Southern Oscillation; Real Oil Returns and Volatility; Higher-Order Nonparametric Causality in Quantiles Test (search for similar items in EconPapers)
JEL-codes: C22 Q41 Q55 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2020-11
New Economics Papers: this item is included in nep-ene, nep-his and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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