Dynamic Impact of the U.S. Monetary Policy on Oil Market Returns and Volatility

Abstract In this paper, we assess the dynamic impact of the U.S. monetary policy announcements on oil market futures returns and volatility. We use intra-day data for West Texas Intermediate (WTI) oil futures together with a time-varying modeling approach to study the nature of this dynamic impact. In addition, we also control for macroeconomic news shocks and separately study the response of good and bad realized volatility. Evidence suggests that there is a significant time variation in the response of oil returns, as well as its volatility to the Federal Reserve policy announcements. Broadly, we also find that higher (lower) uncertainty about Federal Reserve policy actions is associated with a weaker (stronger) impact of the surprise policy announcements on oil returns and volatility.