Fundamentals, Derivatives Market Information and Oil Price Volatility

Michel Andre Robe, Jonathan Wallen

Research output: Contribution to journalArticlepeer-review

Abstract

We analyze empirically what drives market expectations of crude oil price volatility. Between 2000 and 2014, we investigate the links between the term structure of oil option-implied volatilities (IVs) and global macroeconomic conditions, physical market fundamentals (OPEC surplus output capacity, oil storage) and economy-wide financial conditions (captured by the equity VIX). The VIX and the constraints affecting oil output or inventories have statistically and economically significant explanatory power for the short-dated oil IVs and for the WTI IV term structure. After controlling for the VIX, in contrast, macroeconomic variables and a measure of speculative activity based on public data are both insignificant. Our model, which outperforms a benchmark ARIMA specification both in and out of sample, suggests an approach for studying volatility in asset markets that behave as satellites to other markets. Published 2015. This article is a U.S. Government work and is in the public domain in the USA.

Original languageEnglish (US)
Pages (from-to)317-344
Number of pages28
JournalJournal of Futures Markets
Volume36
Issue number4
DOIs
StatePublished - Apr 1 2016
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance
  • Economics and Econometrics

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