Oil Market Volatility: Is Macroeconomic Uncertainty Systematically Transmitted to Oil Prices?

Abstract

The aim of this contribution is to analyze the impact of macroeconomic uncertainty on the oil market. We rely on a robust measure of macroeconomic uncertainty based on a wide range of monthly macroeconomic and financial indicators, which is linked to predictability rather than to volatility. We estimate a structural threshold vector autoregressive (TVAR) model to account for the varying effect of macroeconomic uncertainty on oil price returns depending on the degree of uncertainty, from which we derive a robust proxy of oil market uncertainty. Our findings show that a significant component of oil price uncertainty can be explained by macroeconomic uncertainty. In addition, we find that the recent 2007–2009 recession has generated an unprecedented episode of high uncertainty in the oil market that is not necessarily accompanied by a subsequent volatility in the price of oil. This result highlights the relevance of our uncertainty measure in linking uncertainty to predictability rather than to volatility.