On the effect of short-run and long-run US economic expectations on oil and gold volatilities

Abstract

This paper investigates the effect of US Economic expectations on oil and gold volatilities, examining their formation across different time horizons. To this end, we compute expectations using a MS-VAR model from one (short run) to sixteen quarters ahead (long run). Then, we estimate the impact of an expectation shock on oil and gold volatility measures through an impulse response function estimating a VAR model from 1987Q1 to 2022Q1. Our results show that oil volatility is significantly affected by expectations in the short run, while gold volatility is affected by expectations in the long run. In particular, gold and oil volatilities exhibit a decrease following a positive expectation shock.