Fundamentals, Derivatives Market Information and Oil Price Volatility

Journal of Futures Markets, Vol. 36, No. 4, April 2016

Posted: 9 Jun 2015 Last revised: 26 Feb 2021

See all articles by Michel A. Robe

Michel A. Robe

University of Richmond - E. Claiborne Robins School of Business

Jonathan Wallen

Stanford University, Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2015

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.

Keywords: Implied volatility, Satellite market, Crude oil, VIX, Physical market, Output constraints, Inventories, Speculation

JEL Classification: E31, Q4, G140

Suggested Citation

Robe, Michel A. and Wallen, Jonathan, Fundamentals, Derivatives Market Information and Oil Price Volatility (May 31, 2015). Journal of Futures Markets, Vol. 36, No. 4, April 2016, Available at SSRN: https://ssrn.com/abstract=2615807

Michel A. Robe (Contact Author)

University of Richmond - E. Claiborne Robins School of Business ( email )

Richmond, VA 23173
United States

Jonathan Wallen

Stanford University, Graduate School of Business ( email )

Stanford, CA
United States

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