News-based Equity Market Uncertainty and Crude Oil Volatility

Abstract

Previous studies indicate that the US equity market implied volatility index (VIX) impacts the crude oil market volatility. However, the VIX typically reflects macroeconomic fluctuations, little affected by social media or investor perception changes. In this paper, we use recently introduced news-based equity market volatility (EMV) trackers to examine their impacts on crude oil volatility in its various states and their ability to predict oil volatility relative to that of the VIX. Applying quantile regressions, the results indicate a significant impact of EMV trackers on the oil market volatility during periods of high oil volatility, whereas the impact is mostly insignificant when the oil market is less volatile, which points to an asymmetry. Further analysis shows that various EMV trackers (EMV-overall, EMV-commodity, EMV-crises) have better forecasting power than VIX, economic policy uncertainty (EPU) and geopolitical risk (GPR) indexes. Our findings are relevant to asset pricing, oil portfolio formation, and risk management.