Modeling crude oil volatility is of substantial interest for both energy researchers and policy makers. The aim is to investigate the impact of the U.S. Federal Reserve monetary policy on crude oil future price (COFP) volatility. By means of the generalized autoregressive conditional heteroskedasticity-mixed data sampling (GARCH-MIDAS) model, the Effective Federal Fund Rate (EFFR) - as a proxy of the monetary policy - is plugged into the GARCH(1,1) model. Strong evidence of an inverse relation between the EFFR and COFP volatility is found. This means that an expansionary monetary policy is associated with an increase of the COFP volatility. Conjecturing that the unusual behavior of the COFP in 2007- 2008 was driven by a monetary policy shock, we test the presence of mildly explosive behavior in the prices. The sup Augmented Dickey-Fuller test (SADF) confirms the presence of a bubble in the COFP series that started in October 2007 and ended in October 2008. We expect that the COFP-EFFR association could be affected by such a bubble. Therefore, we apply the same experimental set-up to two sub-samples - before and after October 2007. Interestingly, the results show that EFFR influence on COFP volatility is greater in the aftermath of the bubble.
Does U.S. monetary policy affect crude oil future price volatility? An empirical investigation
AMENDOLA, Alessandra;CANDILA, VINCENZO;SCOGNAMILLO , ANTONIO
2014
Abstract
Modeling crude oil volatility is of substantial interest for both energy researchers and policy makers. The aim is to investigate the impact of the U.S. Federal Reserve monetary policy on crude oil future price (COFP) volatility. By means of the generalized autoregressive conditional heteroskedasticity-mixed data sampling (GARCH-MIDAS) model, the Effective Federal Fund Rate (EFFR) - as a proxy of the monetary policy - is plugged into the GARCH(1,1) model. Strong evidence of an inverse relation between the EFFR and COFP volatility is found. This means that an expansionary monetary policy is associated with an increase of the COFP volatility. Conjecturing that the unusual behavior of the COFP in 2007- 2008 was driven by a monetary policy shock, we test the presence of mildly explosive behavior in the prices. The sup Augmented Dickey-Fuller test (SADF) confirms the presence of a bubble in the COFP series that started in October 2007 and ended in October 2008. We expect that the COFP-EFFR association could be affected by such a bubble. Therefore, we apply the same experimental set-up to two sub-samples - before and after October 2007. Interestingly, the results show that EFFR influence on COFP volatility is greater in the aftermath of the bubble.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
