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Downside uncertainty shocks in the oil and gold markets

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  • Roh, Tai-Yong
  • Byun, Suk Joon
  • Xu, Yahua

Abstract

We construct downside variance risk premiums from the crude oil and gold option data and use them as proxies for market downside uncertainty risks. We find that these downside variance risk premiums contain commodity market-specific pricing information. Furthermore, the gold market’s exposure to downside uncertainty shocks is cross-sectionally priced in the stock market while its crude oil market counterpart is not. This implies that the downside uncertainty for the gold market may be a key state variable representing investment opportunity sets under the Intertemporal Capital Asset Pricing Model (ICAPM).

Suggested Citation

  • Roh, Tai-Yong & Byun, Suk Joon & Xu, Yahua, 2020. "Downside uncertainty shocks in the oil and gold markets," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 291-307.
  • Handle: RePEc:eee:reveco:v:66:y:2020:i:c:p:291-307
    DOI: 10.1016/j.iref.2019.12.003
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    More about this item

    Keywords

    Commodity markets; Downside uncertainty shocks; Downside variance risk premiums; Pricing implications;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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