Fundamentals, Derivatives Market Information and Oil Price Volatility

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, o...

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Published in:The journal of futures markets 2016-04, Vol.36 (4), p.317-344
Main Authors: Robe, Michel A., Wallen, Jonathan
Format: Article
Language:English
Subjects:
Crude oil
Crude oil prices
Derivatives
Economic models
Macroeconomics
Volatility
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description 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. Jrl Fut Mark 36:317–344, 2016
doi_str_mv 10.1002/fut.21732
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source International Bibliography of the Social Sciences (IBSS); Wiley-Blackwell Read & Publish Collection; EBSCOHost: Business Source Ultimate
subjects Crude oil
Crude oil prices
Derivatives
Economic models
Macroeconomics
Volatility
title Fundamentals, Derivatives Market Information and Oil Price Volatility
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