Infectious Diseases, Market Uncertainty and Oil Market Volatility

Elie I. Bouri · Rıza Demirer · Rangan Gupta · Christian Pierdzioch

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Market Dynamics and Volatility Financial Risk and Volatility Modeling COVID-19 Pandemic Impacts

Abstract

We examine the predictive power of a daily newspaper-based index of uncertainty associated with infectious diseases (EMVID) for oil-market volatility. Using the heterogeneous autoregressive realized volatility (HAR-RV) model, we document a positive effect of the EMVID index on the realized volatility of crude oil prices at the highest level of statistical significance, within-sample. Importantly, we show that incorporating EMVID into a forecasting setting significantly improves the forecast accuracy of oil realized volatility at short-, medium-, and long-run horizons. Our findings comprise important implications for investors and risk managers during the unprecedented episode of high uncertainty resulting from the COVID-19 pandemic.

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References

2016Measuring Economic Policy Uncertainty*2008A Simple Approximate Long-Memory Model of Realized Volatility 2020COVID-Induced Economic Uncertainty 2006Asymptotics for out of sample tests of Granger causality 2008Realized Volatility: A Review 2016The role of news-based uncertainty indices in predicting oil markets: a hybrid nonparametric quantile causality method 2017Forecasting oil price realized volatility using information channels from other asset classes 2010Quasi-maximum likelihood estimation of volatility with high frequency data

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2020Infectious disease-related uncertainty and the safe-haven characteristic of US treasury securities 2021On the Relationship between Oil and Exchange Rates of Oil-Exporting and Oil-Importing Countries: From the Great Recession Period to the COVID-19 Era 2021Oil prices volatility and economic performance during COVID-19 and financial crises of 2007–2008 2021Preventing crash in stock market: The role of economic policy uncertainty during COVID-19 2021Government responses to COVID-19 and industry stock returns

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