Oil tail risks and the realized variance of consumer prices in advanced economies

In this study, we examine the nexus between oil tail risks and the realized variance of consumer prices in six advanced economies, namely, Canada, France, Germany, Japan, the United Kingdom, and the United States. Importantly, we estimate the oil tail risks following the Conditional Autoregressive Value at Risk (CAViaR) of Engle and Manganelli (2004) which utilizes the tail distribution rather than the whole distribution in the esti-mation process. Thereafter, we evaluate the predictive value of the oil tail risk for both in-sample and out-of -sample forecasts. We find evidence of a positive relationship between oil tail risks and inflation volatility (variance of consumer prices) in all our sample countries barring Germany. In addition, our predictability results suggest that oil tail risk contains some predictive information for the variance of the consumer prices, indicating that high risk associated with the oil market causes an increase in the volatility of consumer prices in advanced countries. Given the peculiarity of oil as an intermediate input, our results have implications for businesses that depend largely on crude oil as an input, and also for fiscal and monetary authorities who are responsible for containing inflation as a macroeconomic goal.