Global tail risk and oil return predictability

Abstract

This paper mainly investigates whether the global tail risk, World Fear of Hollstein et al. (2019), contains valuable information for oil return prediction. With economic constraint approaches, World Fear can provide incremental content compared to most of the given macro variables to predict oil returns. The analysis based on business cycles highlights the World Fear's satisfactory performances during recessions. In addition, the multi-period forecasts further confirm the satisfactory predictability of the World Fear for oil return. Our results shed new insights for the oil market from the perspective of global tail risk.