The time-varying impact of uncertainty on oil market fear: Does climate policy uncertainty matter?

Implied volatility index is a popular proxy for market fear. This paper uses the oil implied volatility index (OVX) to investigate the impact of different uncertainty measures on oil market fear. Our uncertainty measures consider multiple perspectives, specifically including climate policy uncertainty (CPU), geopolitical risk (GPR), economic policy uncertainty (EPU), and equity market volatility (EMV). Based on the time-varying parameter vector autoregression (TVP-VAR) model, our empirical results show that the impact of CPU, GPR, EPU, and EMV on OVX is time-varying and heterogeneous due to these uncertainty measures containing different information content. In particular, the CPU has become increasingly important for triggering oil market fear since the recent Paris Agreement. During the COVID-19 pandemic, CPU, EPU, and EMV, rather than GPR, play a prominent role in increasing oil market fear.

Automated summary

This paper investigates the impact of different uncertainty measures on oil market fear using the oil implied volatility index (OVX). The empirical results show that the impact of climate policy uncertainty (CPU), geopolitical risk (GPR), economic policy uncertainty (EPU), and equity market volatility (EMV) on OVX is time-varying and heterogeneous due to the different information content contained in these uncertainty measures. Specifically, CPU has become increasingly important for triggering oil market fear since the recent Paris Agreement. During the COVID-19 pandemic, CPU, EPU, and EMV, rather than GPR, play a prominent role in increasing oil market fear.