Good volatility, bad volatility and economic uncertainty: Evidence from the crude oil futures market

Abstract

We first decompose the monthly West Texas Intermediate crude oil futures price volatility into good volatility and bad volatility and then analyse the time-varying asymmetric effects of economic uncertainty shocks on different crude oil price volatility indexes (including volatility, good volatility, and bad volatility) . The main empirical results are as follows. First, the effects of economic uncertainty shocks are significantly greater on bad volatility than on good volatility, regardless of whether time-varying or time-invariant parameterisation is used. Second, the effects of economic uncertainty shocks on bad volatility tend to be countercyclical, and the greatest effects of economic uncertainty shocks on bad volatility were apparent during the 2007–2009 financial crisis, whereas the greatest effects of economic uncertainty shocks on good volatility were apparent at the beginning of 2015. Third, from the time-varying forecast error variance decomposition, we find that economic uncertainty shocks contribute at least twice as much to bad volatility variations as they do to good volatility variations, indicating that economic uncertainty shocks cause relatively more bad volatility movements.