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A Fear Index to Predict Oil Futures Returns

Author Info

Listed author(s):
  • Julien Chevallier

    (Université Paris 8 (LED))

  • Benoît Sévi

    (Aix-Marseille Université (Aix-Marseille School of Economics), CNRS & EHESS)

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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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2013.62.

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Date of creation: Jun 2013
Handle: RePEc:fem:femwpa:2013.62
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Keywords: Oil Futures; Variance Risk Premium; Forecasting;

Other versions of this item:

Find related papers by JEL classification:
  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
  • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
  • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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