Downside Uncertainty Shocks in the Oil and Gold Markets

33 Pages Posted: 8 Aug 2019

See all articles by Yahua Xu

Yahua Xu

Central University of Finance and Economics (CUFE) - China Economics and Management Academy

Ro Cho

Massey University, College of Business, School of Economics and Finance

Tai-Yong Roh

Liaoning University

Date Written: July 25, 2019

Abstract

We construct downside variance risk premiums from the crude oil and gold option data and use them as proxies for market downside uncertainty risks. We find that these downside variance risk premiums contain commodity market-specific pricing information. Further- more, the gold market's exposure to downside uncertainty shocks is cross-sectionally priced in several sectors of the stock market while its crude oil market counterpart is not. This implies that the downside uncertainty for the gold market may be a key state variable rep- resenting investment opportunity sets under the Intertemporal Capital Asset Pricing Model (ICAPM).

Keywords: Commodity markets; Downside uncertainty shocks; Downside variance risk premiums; Pricing implications

JEL Classification: G1; C5; Q3; Q4

Suggested Citation

Xu, Yahua and Cho, Ro and Roh, Tai-Yong, Downside Uncertainty Shocks in the Oil and Gold Markets (July 25, 2019). Available at SSRN: https://ssrn.com/abstract=3426556 or http://dx.doi.org/10.2139/ssrn.3426556

Yahua Xu (Contact Author)

Central University of Finance and Economics (CUFE) - China Economics and Management Academy ( email )

NO.39 South College Road
Haidian District
Beijing, 100081
China

Ro Cho

Massey University, College of Business, School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

Tai-Yong Roh

Liaoning University ( email )

Shenyang, Liaoning
China

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