Forecasting oil price volatility: Does oil price uncertainty matter?

In this paper we empirically examine the predictive power of oil price uncertainty on time varying volatility in the oil futures market. Quantifying oil price uncertainty as the purely unforecastable component of oil price changes, we find this measure has significant predictive power for the return volatility of crude oil futures for horizons up to nine months ahead. Moreover, our oil price uncertainty factor outperforms the realized oil price volatility. In addition, our SVAR model shows that the effect of oil price uncertainty shock on oil market volatility is higher in magnitude and persistence when compared with the effect of aggregate demand, oil demand, supply and oil price volatility shocks.