Abstract
In this paper, we examine the existence of sentiment exposure in oil price returns. We augment the SVAR model of Kilian and Park (International Economic Review, 2009, 50, 1267–1287) by including the effects of (1) investors sentiment proxied by Google’s search volume index, (2) economic policy uncertainty (EPU) and (3) time variation in both coefficients and the variance-covariance matrix. Our empirical results show that changes in investor attention do exhibit a significant long-lasting impact on oil and stock market returns. Aggregate oil demand and supply shocks have a transitory effect on investor sentiment. We reveal that the impact of EPU is temporary and significant, while EPU responds strongly to shocks on oil prices and stock market returns. In all cases, the magnitude and sign of responses are affected by the timing of the shock. Our findings are robust to an alternative sentiment indicator and once the role of oil inventories is considered.
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