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A fear index to predict oil futures returns

  • Julien Chevallier
  • Benoit Sevi

This paper evaluates the predictability of WTI light sweet crude oil futures by us- ing the variance risk premium, i.e. the difference between model-free measures of implied and realized volatilities. Additional regressors known for their ability to ex- plain crude oil futures prices are also considered, capturing macroeconomic, finan- cial 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 R-squared across our regressions). It complements other fi- nancial (e.g. default spread) and oil-specific (e.g. US oil stocks) factors highlighted in previous literature.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-333.

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Length: 25 pages
Date of creation: 16 Jun 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-333
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