Quantum mechanics

Engineering

Shock (circulatory)

Futures contract

Petroleum engineering

Granger causality

Economics

Futures market

Physics

Monetary economics

Econometrics

Internal medicine

Financial economics

Medicine

Crude oil

Causality (physics)

Energy Economics

This paper is the first to comprehensively investigate the causality between the crude oil futures market and investor sentiment under extreme shocks. By dividing the data into various pairs of extreme positive, extreme negative and normal shocks, we introduce an extended Granger causality approach in the time and frequency domains. Although weak evidence of Granger causality is discovered, we find evidence of strong causality running from extreme sentiment to crude oil futures, which has not been documented in previous literatures. Moreover, the crude oil futures market and investor sentiment show dynamic causality at different frequencies, while the extreme shock-related causal linkages from the frequency perspective illustrate that short-term causality is more significant than medium- and long-term causality. Finally, we find evidence that crude oil futures are more strongly affected by negative extreme shocks than by positive extreme shocks. Our findings call for investors to make better risk management decisions and for policymakers to design better macroeconomic and energy policies.

The importance of extreme shock: Examining the effect of investor sentiment on the crude oil futures market