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Oil Volatility Risk and Expected Stock Returns

Listed author(s):
  • Peter Christoffersen

    ()

    (University of Toronto, Rotman School of Management and CREATES)

  • Xuhui (Nick) Pan

    ()

    (Tulane University, A.B. Freeman School of Business)

After the financialization of commodity futures markets in 2004-05 oil volatility has become a strong predictor of returns and volatility of the overall stock market. Furthermore, stocks' exposure to oil volatility risk now drives the cross-section of expected returns. The difference in average return between the quintile of stocks with low exposure and high exposure to oil volatility is significant at 0.66% per month, and oil volatility risk carries a significant risk premium of -0.60% per month. In the post-financialization period, oil volatility risk is strongly related with various measures of funding liquidity constraints suggesting an economic channel for the effect.

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Paper provided by Department of Economics and Business Economics, Aarhus University in its series CREATES Research Papers with number 2015-06.

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Length: 54
Date of creation: 02 Dec 2014
Handle: RePEc:aah:create:2015-06
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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