Climate Policy Uncertainty and Crude Oil Market Volatility

Abstract

In this study, we pursue two main innovations. First, we evaluate the predictive value of climate policy uncertainty (CPU) for oil market volatility. Second, we demonstrate how an investor can exploit the information contents of CPU to gain higher returns. We find that increased values of CPU heighten crude oil market risk, while higher forecast gains are achieved in a model that accommodates CPU. We further show that observing CPU offers higher portfolio returns than ignoring it.