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Leverage vs. Feedback: Which Effect Drives the Oil Market?

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  • Sofiane Aboura

    ()
    (CEREG - Centre de Recherche sur la gestion et la Finance - DRM UMR 7088 - Université Paris IX - Paris Dauphine)

  • Julien Chevallier

    ()
    (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)

Abstract

This article brings new insights on the role played by (implied) volatility on the WTI crude oil spot 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 determinant for any type of trading strategy based on futures and options on the OVX implied volatility index, and thus is of interest to traders, risk- and fund-managers.

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Paper provided by HAL in its series Working Papers with number halshs-00720156.

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Date of creation: 23 Jul 2012
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Handle: RePEc:hal:wpaper:halshs-00720156

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Keywords: WTI; Crude Oil Price; Implied Volatility; Leverage Effect; Feedback Effect;

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Cited by:
  1. Julien Chevallier & Benoît Sévi, 2013. "A Fear Index to Predict Oil Futures Returns," Working Papers 2013.62, Fondazione Eni Enrico Mattei.

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