Uncertainty and Crude Oil Returns
20 Pages Posted: 28 Jun 2015 Last revised: 23 Jul 2016
Date Written: June 26, 2015
We use a copula approach to investigate the effect of uncertainty on crude-oil returns. Using copulas to construct multivariate distributions of time-series data permit the calculation of the dependence structure between the series independently of the marginal distributions. Further, we implement the copula estimation using a rolling window method to allow for a time-varying effect of equity and economic policy uncertainty on oil returns. The results show that higher uncertainty, as measured by equity and economic policy uncertainty indices, significantly increase crude-oil returns only during certain periods of time. That is, we find a positive dependence prior to and into the financial crisis and Great Recession, Interestingly, estimation of the copula over the entire sample period leads to a negative dependence between the equity and economic policy indices and the crude-oil return.
Keywords: Uncertainty, oil shocks, copulas
JEL Classification: Q43, Q48
Suggested Citation: Suggested Citation