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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.

Suggested Citation

  • Aboura, Sofiane & Chevallier, Julien, 2013. "Leverage vs. feedback: Which Effect drives the oil market?," Finance Research Letters, Elsevier, vol. 10(3), pages 131-141.
    • Handle: RePEc:eee:finlet:v:10:y:2013:i:3:p:131-141
    DOI: 10.1016/j.frl.2013.05.003
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    More about this item

    Keywords

    WTI; Crude oil price; Implied volatility; Leverage effect; Feedback effect;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • G1 - Financial Economics - - General Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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