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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. Chevallier, Julien & Sévi, Benoît, 2012. "On the volatility–volume relationship in energy futures markets using intraday data," Energy Economics, Elsevier, vol. 34(6), pages 1896-1909.
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  5. 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.
  6. George J. Jiang & Yisong S. Tian, 2005. "The Model-Free Implied Volatility and Its Information Content," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1305-1342.
  7. Peter Carr & Liuren Wu, 2009. "Variance Risk Premiums," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1311-1341, March.
  8. repec:cii:cepiei:2011-q2-3-126-127 is not listed on IDEAS
  9. 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.
  10. Frans A. de Roon & Theo E. Nijman & Chris Veld, 2000. "Hedging Pressure Effects in Futures Markets," Journal of Finance, American Finance Association, vol. 55(3), pages 1437-1456, 06.
  11. Zagaglia, Paolo, 2009. "Macroeconomic Factors and Oil Futures Prices: A Data-Rich Model," Research Papers in Economics 2009:7, Stockholm University, Department of Economics.
  12. Sévi, Benoît & Le Pen, Yannick, 2013. "Futures trading and the excess comovement of commodity prices," Economics Papers from University Paris Dauphine 123456789/11382, Paris Dauphine University.
  13. Hong, Harrison & Yogo, Motohiro, 2012. "What does futures market interest tell us about the macroeconomy and asset prices?," Journal of Financial Economics, Elsevier, vol. 105(3), pages 473-490.
  14. Driesprong, Gerben & Jacobsen, Ben & Maat, Benjamin, 2008. "Striking oil: Another puzzle?," Journal of Financial Economics, Elsevier, vol. 89(2), pages 307-327, August.
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  17. Julien Chevallier, 2013. "Price relationships in crude oil futures: new evidence from CFTC disaggregated data," Environmental Economics and Policy Studies, Society for Environmental Economics and Policy Studies - SEEPS, vol. 15(2), pages 133-170, April.
  18. Bing Han, 2008. "Investor Sentiment and Option Prices," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 387-414, January.
  19. Thomas A. Knetsch, 2007. "Forecasting the price of crude oil via convenience yield predictions," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 26(7), pages 527-549.
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  21. 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.
  22. Peter Christoffersen & Kris Jacobs & Bo Young Chang, 2011. "Forecasting with Option Implied Information," CREATES Research Papers 2011-46, School of Economics and Management, University of Aarhus.
  23. Tim Bollerslev & Hao Zhou, 2006. "Expected stock returns and variance risk premia," Finance and Economics Discussion Series 2007-11, Board of Governors of the Federal Reserve System (U.S.).
  24. Le Pen, Yannick & Sévi, Benoît, 2011. "Macro factors in oil futures returns," Economics Papers from University Paris Dauphine 123456789/11663, Paris Dauphine University.
  25. Coleman, Les, 2012. "Explaining crude oil prices using fundamental measures," Energy Policy, Elsevier, vol. 40(C), pages 318-324.
  26. Christiane Baumeister & Lutz Kilian, 2011. "Real-Time Forecasts of the Real Price of Oil," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(2), pages 326-336, September.
  27. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2006. "Volatility and Correlation Forecasting," Handbook of Economic Forecasting, Elsevier.
  28. Kaufmann, Robert K., 2011. "The role of market fundamentals and speculation in recent price changes for crude oil," Energy Policy, Elsevier, vol. 39(1), pages 105-115, January.
  29. Conrad, Christian & Loch, Karin & Rittler, Daniel, 2012. "On the Macroeconomic Determinants of the Long-Term Oil-Stock Correlation," Working Papers 0525, University of Heidelberg, Department of Economics.
  30. Lin Peng & Turan G. Bali, 2006. "Is there a risk-return trade-off? Evidence from high-frequency data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(8), pages 1169-1198.
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  34. Doran, James S. & Ronn, Ehud I., 2008. "Computing the market price of volatility risk in the energy commodity markets," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2541-2552, December.
  35. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
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