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Large Oil Shocks and the US Economy: Infrequent Incidents with Large Effects

Marc Gronwald

Year: 2008
Volume: Volume 29
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No1-7
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Abstract:
This paper considers the macroeconomics of the oil price for the United States. It investigates the impact of large oil price hikes in a standard VAR framework by introducing a new Markov switching based oil price specification. The explanatory power of this new specification is compared to that of a number of prominent non-linear specifications. The key findings are: (1) the new oil price specification is appropriate in both empirical and theoretical terms and allows for a well-founded distinction between �large� and �normal� oil price increases. (2) The observed impact of oil price shocks on real GDP growth is largely attributable to no fewer than three large oil price increases, namely those of 1973-74, 1979 and 1991, while variables such as consumer and import prices are also affected by normal oil price increases.



Variance Risk Premium in Energy Markets: Ex-Ante and Ex-Post Perspectives

Giacomo Morelli

Year: 2022
Volume: Volume 43
Number: Special Issue
DOI: 10.5547/01956574.43.SI1.gmor
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Abstract:
This paper introduces the ex-ante estimation of the variance risk premium. The novel methodology proposed is applied to forecast variance risk premium in energy markets, capturing the future degree of aversion of investors towards energy variance risks. We analyze the ex-ante variance risk premium of two energy indices, XLE and USO, during the period that spans from 2011 to 2022, and compare them to that of the SPX, the benchmark for the equity market. In the computation of the ex-ante variance risk premium, simple GARCH and Markov-switching GARCH models are exploited to forecast the realized variance, while variance swap rates are retrieved from the volatility indices VXXLE, OVX, and VIX of the three market indices. We find that the ex-ante variance risk premium succeeds to forecast the imminent periods of financial distress empirically detected in the abrupt surges and plunges of the ex-post variance risk premium. In particular, USO shows higher magnitudes of the variance risk premium than XLE and SPX, predicting that investors require on average higher premiums to bear oil variance risks.





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