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Monetary policy and oil volatility smirk

Author

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  • Tian, Yuan
  • Zhao, Junzhu
  • Zhen, Fang

Abstract

This paper investigates the transmission of U.S. monetary policy shocks to oil market dynamics, focusing on oil price uncertainty and tail risks. Using a structural VAR model, we reveal that tight monetary policy induces a sustained increase in oil market uncertainty while reducing left-tail risk, as hedgers exhibit diminished concern over extreme downside risks. In contrast, the impact on right-tail risk is statistically insignificant. Moreover, the effects of monetary policy shocks are asymmetric: while contractionary policies raise oil uncertainty and expansionary policies reduce it, tight monetary policies exert a stronger influence on left-tail risk, with pronounced disparities in the response of right-tail risk between tightening and loosening policies.

Suggested Citation

  • Tian, Yuan & Zhao, Junzhu & Zhen, Fang, 2025. "Monetary policy and oil volatility smirk," International Review of Financial Analysis, Elsevier, vol. 104(PB).
    • Handle: RePEc:eee:finana:v:104:y:2025:i:pb:s1057521925003874
    DOI: 10.1016/j.irfa.2025.104300
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    More about this item

    Keywords

    Monetary policy; Oil volatility; Structural VAR; Asymmetric effects;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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