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Evidence of unspanned stochastic volatility in crude-oil market

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  • Razvan Tudor

Abstract

The purpose of this paper is to conduct a comprehensive analysis of unspanned stochastic volatility in commodity markets with focus and empirical evidence on crude-oil market. Using crude-oil futures and options on futures data from New York Mercantile Exchange (NYMEX) there are presented model-free results that strongly suggest the presence of unspanned stochastic volatility in the crude-oil market. Sharp oil prices changes exert influence on macroeconomic activity in general and crude-oil industry in particular. The importance of the results is that they show the extent to which volatility risk is spanned by the futures contracts. The extent to which crude-oil futures contracts trading span volatility will indicate if options on futures are redundant securities or there is needed a mixed strategy combining both types of crude-oil market derivatives (futures and options) to fully hedge against volatility risk.

Suggested Citation

  • Razvan Tudor, 2009. "Evidence of unspanned stochastic volatility in crude-oil market," Advances in Economic and Financial Research - DOFIN Working Paper Series 33, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
    • Handle: RePEc:cab:wpaefr:33
    as

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    File URL: http://www.dofin.ase.ro/Working%20papers/Tudor%20Razvan/tudor.razvan.dissertation.pdf
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    References listed on IDEAS

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    Keywords

    unspanned stochastic volatility; oil market;

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