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Leverage vs. feedback: Which Effect drives the oil market?

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  • Aboura, Sofiane
  • Chevallier, Julien

Abstract

This article brings new insights on the role played by (implied) volatility on the WTI crude oil price. An increase in the volatility subsequent to an increase in the oil price (i.e. inverse leverage effect) remains the dominant effect as it might reflect the fear of oil consumers to face rising oil prices. However, this effect is amplified by an increase in the oil price subsequent to an increase in the volatility (i.e. inverse feedback effect) with a two-day delayed effect. This lead-lag relation between the oil price and its volatility is central to any type of trading strategy based on futures and options on the OVX implied volatility index. It is of interest to traders, risk- and fund-managers.

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Bibliographic Info

Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 10 (2013)
Issue (Month): 3 ()
Pages: 131-141

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Handle: RePEc:eee:finlet:v:10:y:2013:i:3:p:131-141

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Web page: http://www.elsevier.com/locate/frl

Related research

Keywords: WTI; Crude oil price; Implied volatility; Leverage effect; Feedback effect;

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References

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Cited by:
  1. Julien Chevallier & Benoit Sevi, 2014. "A fear index to predict oil futures returns," Working Papers 2014-333, Department of Research, Ipag Business School.

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