OPEC news and volatility expectations

In this paper, I hypothesize that oil price uncertainty, particularly as proxied by OPEC news, influences expectations of equity volatility. I find that while oil price uncertainty shows a low correlation with contemporaneous US equity market volatility, but has a significant negative impact on expected returns. Specifically, an OPEC news-managed US equity portfolio delivers an annualized equity-risk-adjusted alpha exceeding 5 %, substantially outperforming portfolios managed based on equity and oil volatility. Additionally, I demonstrate that oil price uncertainty shapes volatility expectations. An OPEC news-managed strategy, which buys (sells) S&P 500 straddles when OPEC news is high (low), outperforms a portfolio managed by realized volatility.