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Is investor sentiment stronger than VIX and uncertainty indices in predicting energy volatility?

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  • Chen, Zhonglu
  • Liang, Chao
  • Umar, Muhammad

Abstract

This paper investigates whether investor sentiment has stronger predictive power than VIX and uncertainty indices in predicting the realized volatility (RV) of energy assets. The five representative energy assets we consider are natural gas spot and futures, WTI oil spot and futures, and Brent oil spot. Several significant findings appear. First, the in-sample results suggest that VIX has a significantly positive impact on the five energy assets and investor sentiment has a significantly positive impact only for WTI oil futures and spot. Second, the out-of-sample results show that investor sentiment performs best predictions for the RV of three crude oil-related assets, followed by VIX, however, they have almost no predictive ability on natural gas futures and spot. Third, the use of VIX can increase economic returns for natural gas spot, and the use of investor sentiment can achieve higher economic returns for three crude oil-related assets. Finally, the results are supported by numerous robustness checks.

Suggested Citation

  • Chen, Zhonglu & Liang, Chao & Umar, Muhammad, 2021. "Is investor sentiment stronger than VIX and uncertainty indices in predicting energy volatility?," Resources Policy, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:jrpoli:v:74:y:2021:i:c:s0301420721004001
    DOI: 10.1016/j.resourpol.2021.102391
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