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Oil and the short-term predictability of stock return volatility

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  • Wang, Yudong
  • Wei, Yu
  • Wu, Chongfeng
  • Yin, Libo

Abstract

The goal of this paper is to show that crude oil volatility is predictive of stock volatility in the short-term from both in-sample and out-of-sample perspectives. The revealed predictability is also of economic significance, as shown by examining the performance of portfolios constructed on the oil-based forecasts of stock volatility. Results from robustness tests suggest that oil volatility provides different information from traditional macro variables. Further analysis shows that simple linear regression is sufficient for capturing predictive relationships between oil and stock volatility. Oil volatility is found to predict return volatilities of a significant number of industry portfolios during recent periods.

Suggested Citation

  • Wang, Yudong & Wei, Yu & Wu, Chongfeng & Yin, Libo, 2018. "Oil and the short-term predictability of stock return volatility," Journal of Empirical Finance, Elsevier, vol. 47(C), pages 90-104.
    • Handle: RePEc:eee:empfin:v:47:y:2018:i:c:p:90-104
    DOI: 10.1016/j.jempfin.2018.03.002
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