Oil volatility risk and stock market volatility predictability: Evidence from G7 countries

Academic research relies extensively on stock market information to forecast oil volatility, with relatively little attention paid to the reverse evidence. Our paper fills this gap by investigating the predictive ability of oil volatility risk to forecast stock market volatility. Using oil volatilit...

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Bibliographic Details
Published in:Energy economics 2017-10, Vol.68, p.240-254
Main Authors: Feng, Jiabao, Wang, Yudong, Yin, Libo
Format: Article
Language:English
Subjects:
Crude oil
Economic forecasting
Economic significance
Energy economics
Forecasting
Low level
Macroeconomics
Oil
Oil volatility risk premium
Out-of-sample forecast
Petroleum
Power
Predictions
Predictive regression
Risk
Securities markets
Statistical analysis
Stock exchanges
Stock realized volatility
Studies
Volatility
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Summary:Academic research relies extensively on stock market information to forecast oil volatility, with relatively little attention paid to the reverse evidence. Our paper fills this gap by investigating the predictive ability of oil volatility risk to forecast stock market volatility. Using oil volatility risk premium (oil VRP) as the predictor, we find that oil VRP does exhibit statistically and economically significant in-sample and out-of-sample forecasting power for G7 countries, even controlling for some popular macroeconomic variables. These findings are robust when using alternative proxies for volatilities of stock and oil. Furthermore, the strength of the predictive evidence is substantial during relatively high and low level of stock market, while is substantially higher for recessions vis-á-vis expansions. Oil VRP can also contains additional information for predicting a series of macroeconomic variables, which serves as an available explanation for its forecasting ability. •Oil volatility exhibits significant forecasting power for G7 stock market volatilities.•Predictability holds well even controlling for some popular macroeconomic variables.•The predictability is robust during relatively high and low level of stock market.•The predictability is substantially higher for expansions vis-á-vis recessions.•Oil volatility contains information for predicting a series of macroeconomic variables.
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2017.09.023