Time‐varying causality between investor sentiment and oil price: Does uncertainty matter?

Abstract While the oil market‐investors sentiment (IS) has been considerably investigated, almost all studies have focused on the assumption of a constant relationship, and no attention has been given to the causality analysis in a time‐varying approach. To fill this gap, this study investigates the predictive power between IS and oil price based on a time‐varying Granger causality test. Using data over the period 1987–2020, we find evidence of significant bidirectional asymmetric time‐varying causal influences between investor sentiment and oil prices, suggesting that oil prices may predict investor sentiment and vice versa. Besides, the results suggest that bearish (bullish) investor sentiment has positive (negative) influences on oil prices during major economic and political events. In contrast, oil price exerts an influence on the sentiment which switches between positive and negative from one period to another. Further analysis shows that uncertainty related to the oil and equity markets can be a driver of the predictive power of oil prices on the bearish IS.