Technology shocks and crude oil market connection: The role of climate change

Abstract

We study the connection between global technology shocks (TS) and the crude oil market from 1880 to 2018. Our study utilizes newly constructed global TS datasets that cover OECD countries and 164 countries, while also considering the role of climate change using temperature anomalies. We use the GARCH-MIDAS framework to account for mixed data frequencies and statistical properties of the variables. Our findings show that the link between TS and oil return volatility is episodic, with the relationship becoming apparent after the great depression of the 1930s. Technological innovations appear to moderate oil return volatility. We also estimate the effect of climate change-augmented TS on oil volatility and find that it reduces the potential of technology shocks to lessen oil return volatility. We also find that the out-of-sample forecast gains are realized from observing TS and climate change in the predictability of oil return volatility. Nonetheless, a more general definition of global TS (with 164 countries) offers higher forecast gains than a more restricted global TS (with OECD countries only). Finally, we document the implications of our findings for policy and practice.