Does the financial crisis change the economic risk perception of crude oil traders? A MIDAS quantile regression approach

Likun Lei, Yue Shang, Yongfei Chen and Yu Wei

Finance Research Letters, 2019, vol. 30, issue C, 341-351

Abstract: In this paper, we argue that the 2008 financial crisis changes the economic risk perception of crude oil traders. Using the economic policy uncertainty (EPU) index as a proxy of economic risk, we examine the change of EPU's impacts on WTI oil spot and futures returns, i.e., the return-risk relationship in crude oil market, before and after the crisis by a MIDAS quantile regression approach. The empirical results shows that, before the crisis, the EPU has a significant negative effect on oil returns; but after the crisis, higher (lower) EPU is always accompanied with significantly higher (lower) oil returns at various quantiles. This finding indicates that the recent global financial crisis changes the risk perception of oil traders and the return-risk relationship in crude oil market. Before the crisis, traders tend to be bearish in oil market when facing large economic risk; while after the crisis, they are inclined to be bullish and take oil assets as risk hedging tools in front of increasing economic risks.

Keywords: Crude oil market; Oil financialization; MIDAS quantile regression; Economic policy uncertainty (search for similar items in EconPapers)
JEL-codes: C22 C53 C58 G11 G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:30:y:2019:i:c:p:341-351

DOI: 10.1016/j.frl.2018.10.016

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