Does crude oil price volatility respond asymmetrically to financial shocks?

Abstract

Recent literature has explored the effect of monetary and financial shocks, along with oil supply and global demand shocks, in determining oil price volatility. This paper elucidates whether the change in oil price volatility in response to financial shocks differs over quantiles over the period 1993–2021. First, we disintegrate the structural innovations to oil price volatility, originating from crude oil production, global demand, oil demand, oil inventories, interest rates, and financial market volatility, using the SVAR approach during pre-crisis and post-crisis phases. Furthermore, using quantile autoregressive distributed lag models (QARDL) and nonlinear autoregressive distributed lag (NARDL) models, we analyze the plausible asymmetric effects of these shocks. The findings indicate the significance of supply-side and global demand shocks on oil price volatility in the pre-crisis periods, followed by the increase in the explanatory power of financial shocks on oil price volatility after the crisis. It also suggests that oil price volatility responds asymmetrically to oil supply, inventories, and financial shocks.