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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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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

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Find related papers by 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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Cited by:

  1. Julien Chevallier & Benoît Sévi, 2013. "A Fear Index to Predict Oil Futures Returns," Working Papers 2013.62, Fondazione Eni Enrico Mattei.
  2. Duc Khuong Nguyen & Ricardo M. Sousa & Gazi Salah Uddin, 2014. "Testing for asymmetric causality from U.S. equity returns to commodity futures returns," Working Papers 2014-545, Department of Research, Ipag Business School.
  3. Florian Ielpo & Benoît Sévi, 2014. "Forecasting the density of oil futures," Working Papers 2014-601, Department of Research, Ipag Business School.

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