Forecasting crude oil prices: Does global financial uncertainty matter?

In this paper, we introduce an informative uncertainty measure, global financial uncertainty (GFU), for the prediction of crude oil price returns. We find that GFU exhibits significant and remarkable forecasting power for crude oil price returns both in- and out-of-sample monthly R 2 of 13.63% and 11.32%, respectively. This predictive power outperforms complements those of popular economic variables and uncertainty measures. Further analysis shows that a mean-variance investor can obtain considerable economic gains based on return forecasts of GFU. By dissecting the GFU's predictability, we observe that the strong forecasting efficacy of GFU for crude oil price returns may stem from its notable power during high-risk conditions and its significant effects on oil demand dynamics.