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The behaviour of energy-related volatility indices around scheduled news announcements: Implications for variance swap investments

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  • López, Raquel

Abstract

This paper investigates the effect of scheduled news announcements on two energy-related volatility indices calculated by the Chicago Board of Options Exchange. These volatility indices are the crude oil volatility index (OVX) and the energy sector volatility index (VXXLE), which measure the market's expectation of 30-day volatility of crude oil prices and energy sector returns, respectively. We find that energy-related volatility indices tend to fall following several US macroeconomic news releases and OPEC meetings. Put differently, these news releases resolve investors' uncertainty about the future development of energy-related markets. Our results also suggest that macroeconomic releases and oil-related events do not seem to exert significantly different impacts on energy market uncertainty. We further document that the observed announcement day patterns cannot be exploited to generate significant returns using variance swaps once we incorporate transaction costs. Our findings are relevant because there are currently no other volatility derivatives traded in exchange markets, such as options or futures, that offer investors pure exposure to energy-related volatility alone as variance swaps do.

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  • López, Raquel, 2018. "The behaviour of energy-related volatility indices around scheduled news announcements: Implications for variance swap investments," Energy Economics, Elsevier, vol. 72(C), pages 356-364.
    • Handle: RePEc:eee:eneeco:v:72:y:2018:i:c:p:356-364
    DOI: 10.1016/j.eneco.2018.04.040
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    2. Nikkinen, Jussi & Rothovius, Timo, 2019. "Energy sector uncertainty decomposition: New approach based on implied volatilities," Applied Energy, Elsevier, vol. 248(C), pages 141-148.
    3. Dutta, Anupam & Bouri, Elie & Saeed, Tareq & Vo, Xuan Vinh, 2020. "Impact of energy sector volatility on clean energy assets," Energy, Elsevier, vol. 212(C).

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    More about this item

    Keywords

    Crude oil; Energy; Exchange-traded fund; News announcements; Variance swap; Volatility index;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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