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Economic Determinants of Oil Futures Volatility: A Term Structure Perspective

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Abstract

To assess the economic determinants of oil futures volatility, we firstly develop and estimate a multi-factor oil futures pricing model with stochastic volatility that is able to disentangle long-term, medium-term and short-term variations in commodity markets volatility. The volatility estimates reveal that in line with theory, the volatility factors are unspanned, persistent and carry negative market price of risk, while crude oil markets are becoming more integrated with financial markets. After 2004, short-term volatility is driven by industrial production, term and credit spreads, the S&P 500 and the US dollar index, along with the traditional drivers including hedging pressure and VIX. Medium-term volatility is consistently related to open interest and credit spreads, while after 2004 oil sector variables such as inventory and consumption also impact this part of the term structure. Interest rates mostly matter for long-term futures price volatility.

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  • Boda Kang & Christina Sklibosios Nikitopoulos & Marcel Prokopczuk, 2019. "Economic Determinants of Oil Futures Volatility: A Term Structure Perspective," Research Paper Series 401, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:401
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    Cited by:

    1. Christian Urom & Gideon Ndubuisi & Jude Ozor, 2021. "Economic activity, and financial and commodity markets’ shocks: An analysis of implied volatility indexes," International Economics, CEPII research center, issue 165, pages 51-66.
    2. Naomi Boyd & Bingxin Li & Rui Liu, 2022. "Risk premia in the term structure of crude oil futures: long-run and short-run volatility components," Review of Quantitative Finance and Accounting, Springer, vol. 58(4), pages 1505-1533, May.
    3. Wang, Linjie & Etienne, Xiaoli & Li, Jian, 2024. "Food-fuel nexus beyond mean-variance: New evidence from a quantile approach," Journal of Commodity Markets, Elsevier, vol. 36(C).
    4. Nikitopoulos, Christina Sklibosios & Thomas, Alice Carole & Wang, Jianxin, 2023. "The economic impact of daily volatility persistence on energy markets," Journal of Commodity Markets, Elsevier, vol. 30(C).
    5. O-Chia Chuang & Chenxu Yang, 2022. "Identifying the Determinants of Crude Oil Market Volatility by the Multivariate GARCH-MIDAS Model," Energies, MDPI, vol. 15(8), pages 1-14, April.
    6. Xiaomei Yuan & Fang-Rong Ren & Tao-Feng Wu, 2025. "Oil Futures Dynamics and Energy Transition: Evidence from Macroeconomic and Energy Market Linkages," Energies, MDPI, vol. 18(14), pages 1-27, July.
    7. Ben Jabeur, Sami & Boubaker, Sabri & Carmona, Pedro & Stef, Nicolae, 2025. "How do environmental concerns and global economic conditions affect energy prices?," Energy Policy, Elsevier, vol. 204(C).
    8. Feng, Ling & Wang, Jieyu, 2023. "Random sources correlations and carbon futures pricing," International Review of Financial Analysis, Elsevier, vol. 86(C).
    9. French, Joseph J. & Shin, Seungho & Gurdgiev, Constantin & Naka, Atsuyuki, 2024. "Uncertainty and international fund flows: A cross-country analysis," International Review of Financial Analysis, Elsevier, vol. 94(C).
    10. Rice, Gregory & Wirjanto, Tony & Zhao, Yuqian, 2023. "Exploring volatility of crude oil intraday return curves: A functional GARCH-X model," Journal of Commodity Markets, Elsevier, vol. 32(C).
    11. Harrison, Andre & Liu, Xiaochun & Stewart, Shamar L., 2023. "Structural sources of oil market volatility and correlation dynamics," Energy Economics, Elsevier, vol. 121(C).
    12. Wong, Patrick, 2023. "Explaining intraday crude oil returns with higher order risk-neutral moments," Journal of Commodity Markets, Elsevier, vol. 31(C).
    13. Urom, Christian & Ndubuisi, Gideon & Ozor, Jude, 2021. "Economic activity, and financial and commodity markets’ shocks: An analysis of implied volatility indexes," International Economics, Elsevier, vol. 165(C), pages 51-66.
    14. Jian Liu & Ziting Zhang & Lizhao Yan & Fenghua Wen, 2021. "Forecasting the volatility of EUA futures with economic policy uncertainty using the GARCH-MIDAS model," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-19, December.
    15. Ojonugwa Usman & Oktay Ozkan & Chinazaekpere Nwani & Festus Victor Bekun & Andrew Adewale Alola, 2025. "Can household energy efficiency dampen crude oil price volatility in the United States?," PLOS ONE, Public Library of Science, vol. 20(1), pages 1-19, January.
    16. Shao, Chengwu & Bhar, Ramaprasad & Colwell, David B. & Sheng, Ni & Wei, Xinyang, 2024. "Variance dynamics and term structure of the natural gas market," Energy Economics, Elsevier, vol. 137(C).
    17. Chen, Yu-Fu & Mu, Xiaoyi, 2021. "Asymmetric volatility in commodity markets," Journal of Commodity Markets, Elsevier, vol. 22(C).
    18. Xiuwen Chen, 2023. "Are the shocks of EPU, VIX, and GPR indexes on the oil-stock nexus alike? A time-frequency analysis," Applied Economics, Taylor & Francis Journals, vol. 55(48), pages 5637-5652, October.
    19. Christina Sklibosios Nikitopoulos & Alice Carole Thomas & Jianxin Wang, 2024. "Hedging pressure and oil volatility: Insurance versus liquidity demands," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(2), pages 252-280, February.
    20. Yun‐Shi Dai & Peng‐Fei Dai & Wei‐Xing Zhou, 2025. "Geopolitical Risk and the Volatility of the International Grain Futures Market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 45(10), pages 1757-1794, October.
    21. Alfeus, Mesias & Nikitopoulos, Christina Sklibosios, 2022. "Forecasting volatility in commodity markets with long-memory models," Journal of Commodity Markets, Elsevier, vol. 28(C).
    22. Ke Yang & Nan Hu & Fengping Tian, 2024. "Forecasting Crude Oil Volatility Using the Deep Learning‐Based Hybrid Models With Common Factors," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(8), pages 1429-1446, August.
    23. Ignatieva, Katja & Wong, Patrick, 2022. "Modelling high frequency crude oil dynamics using affine and non-affine jump–diffusion models," Energy Economics, Elsevier, vol. 108(C).
    24. Oglend, Atle & Kleppe, Tore Selland, 2025. "Storage scarcity and oil price uncertainty," Energy Economics, Elsevier, vol. 144(C).
    25. Bhattacherjee, Purba & Mishra, Sibanjan & Kang, Sang Hoon, 2023. "Does market sentiment and global uncertainties influence ESG-oil nexus? A time-frequency analysis," Resources Policy, Elsevier, vol. 86(PA).

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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