Downside Uncertainty Shocks in the Oil and Gold Markets

Abstract

We construct downside variance risk premiums from the crude oil and gold option data and use them as proxies for market downside uncertainty risks. We find that these downside variance risk premiums contain commodity market specifc pricing information. Further- more, the gold market's exposure to downside uncertainty shocks is cross-sectionally priced in the stock market while its crude oil market counterpart is not. This implies that the downside uncertainty for the gold market may be a key state variable representing investment opportunity sets under the Intertemporal Capital Asset Pricing Model (ICAPM).