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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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  1. Coleman, Les, 2012. "Explaining crude oil prices using fundamental measures," Energy Policy, Elsevier, vol. 40(C), pages 318-324.
  2. Harrison Hong & Motohiro Yogo, 2011. "What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices?," NBER Working Papers 16712, National Bureau of Economic Research, Inc.
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  8. Zagaglia, Paolo, 2009. "Macroeconomic Factors and Oil Futures Prices: A Data-Rich Model," Research Papers in Economics 2009:7, Stockholm University, Department of Economics.
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  12. Julien Chevallier & Benoît Sévi, 2011. "On the volatility-volume relationship in energy futures markets using intraday data," EconomiX Working Papers 2011-16, University of Paris West - Nanterre la Défense, EconomiX.
  13. Chiara Scotti & S.Boragan Aruoba & Francis X. Diebold & University of Maryland, 2006. "Real-Time Measurement of Business Conditions," Computing in Economics and Finance 2006 387, Society for Computational Economics.
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  18. repec:cii:cepiei:2011-q2-3-126-127 is not listed on IDEAS
  19. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
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  22. Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Labys, Paul, 2002. "Modeling and Forecasting Realized Volatility," Working Papers 02-12, Duke University, Department of Economics.
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  25. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
  26. Melick, William R. & Thomas, Charles P., 1997. "Recovering an Asset's Implied PDF from Option Prices: An Application to Crude Oil during the Gulf Crisis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 91-115, March.
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  28. Bing Han, 2008. "Investor Sentiment and Option Prices," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 387-414, January.
  29. Christiane Baumeister & Lutz Kilian, 2011. "Real-Time Forecasts of the Real Price of Oil," Working Papers 11-16, Bank of Canada.
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