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A Fear Index to Predict Oil Futures Returns

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  • Sévi, Benoît
  • Chevallier, Julien

Abstract

This paper evaluates the predictability of WTI light sweet crude oil futures by using the variance risk premium, i.e. the difference between model-free measures of implied and realized volatilities. Additional regressors known for their ability to explain crude oil futures prices are also considered, capturing macroeconomic, financial and oil-specific influences. The results indicate that the explanatory power of the (negative) variance risk premium on oil excess returns is particularly strong (up to 25% for the adjusted Rsquared across our regressions). It complements other financial (e.g. default spread) and oil-specific (e.g. US oil stocks) factors highlighted in previous literature.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/11714.

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Date of creation: May 2013
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Publication status: Published in Note di lavoro, 2013
Handle: RePEc:dau:papers:123456789/11714

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Keywords: Oil Futures; Variance Risk Premium; Forecasting;

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