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

Author

Listed:
  • Sofiane Aboura

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

  • Julien Chevallier

    () (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

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.

Suggested Citation

  • Sofiane Aboura & Julien Chevallier, 2012. "Leverage vs. Feedback: Which Effect Drives the Oil Market?," Working Papers halshs-00720156, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00720156
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00720156
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Deeney, Peter & Cummins, Mark & Dowling, Michael & Bermingham, Adam, 2015. "Sentiment in oil markets," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 179-185.
    2. repec:eee:eneeco:v:68:y:2017:i:c:p:53-65 is not listed on IDEAS
    3. Aboura, Sofiane & Chevallier, Julien, 2016. "Spikes and crashes in the oil market," Research in International Business and Finance, Elsevier, vol. 36(C), pages 615-623.
    4. Florian Ielpo & Benoît Sévi, 2014. "Forecasting the density of oil futures," Working Papers 2014-601, Department of Research, Ipag Business School.
    5. Julien Chevallier & Benoît Sévi, 2013. "A Fear Index to Predict Oil Futures Returns," Working Papers 2013.62, Fondazione Eni Enrico Mattei.
    6. repec:eee:eneeco:v:66:y:2017:i:c:p:194-204 is not listed on IDEAS
    7. repec:dau:papers:123456789/11714 is not listed on IDEAS
    8. repec:ipg:wpaper:2014-545 is not listed on IDEAS
    9. Agbeyegbe, Terence D., 2015. "An inverted U-shaped crude oil price return-implied volatility relationship," Review of Financial Economics, Elsevier, vol. 27(C), pages 28-45.
    10. Luo, Xingguo & Qin, Shihua, 2017. "Oil price uncertainty and Chinese stock returns: New evidence from the oil volatility index," Finance Research Letters, Elsevier, vol. 20(C), pages 29-34.
    11. Ji, Qiang & Fan, Ying, 2016. "Modelling the joint dynamics of oil prices and investor fear gauge," Research in International Business and Finance, Elsevier, vol. 37(C), pages 242-251.
    12. Nguyen, Duc Khuong & Sousa, Ricardo M. & Uddin, Gazi Salah, 2015. "Testing for asymmetric causality between U.S. equity returns and commodity futures returns," Finance Research Letters, Elsevier, vol. 12(C), pages 38-47.

    More about this item

    Keywords

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

    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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