Financial ambiguity and oil prices

Abstract Recent theoretical developments in economics distinguish between risk and ambiguity (Knightian uncertainty). Using state-of-the-art methods with intraday stock market data from February 1993 to February 2021, we derive financial ambiguity and empirically examine the effect of shocks to it on the price and volatility of crude oil. We provide evidence that ambiguity carries important information about future oil returns and volatility perceived by investors. We validate these results using Granger causality and in-sample and out-of-sample forecasting tests. Our findings reveal that financial ambiguity is a possible factor that explains future drops in oil prices and their increased variability. Our findings will benefit scholars and investors interested in how financial ambiguity shapes short-term oil prices.