Uncertainty, Oil Price, and Volatility Regimes: A New Non-Recursive Identification Approach

Abstract

During the last few decades, several studies have focused on examining the co-movements between oil prices and uncertainty. In this paper, we apply a new non-recursive identification approach to test whether macroeconomic and financial uncertainty precedes or follows changes in oil prices. Primarily, we explore the interaction between uncertainty and oil price changes across different volatility regimes. Our results indicate that macroeconomic and financial uncertainties are exogenous factors that influence the dynamics of oil prices. Furthermore, our findings reveal that during periods of macroeconomic or financial stability, the effects of uncertainty shocks on the oil market become more pronounced, indicating that such shocks can significantly contribute to macroeconomic fluctuations within the oil market. These findings could aid participants in the oil market by enhancing their understanding of how macroeconomic and financial uncertainties impact oil markets, providing them with a foundation for making decisions regarding risk management and portfolio optimization.