The State Price Density Implied by Crude Oil Futures and Option Prices
AFA 2016 Meetings Paper Forthcoming, Review of Financial Studies
57 Pages Posted: 20 Jan 2012 Last revised: 30 Oct 2020
Date Written: September 22, 2020
Both large oil price increases and decreases are associated with deteriorating economic conditions. Consistent with this stylized fact, we find that the projection of the state price density (SPD) on oil returns estimated from oil futures and option prices displays a U-shaped pattern. Because investors assign high state prices to large negative and large positive oil returns, the U-shaped SPD may steepen in either tail when economic conditions deteriorate. The positive return region of the SPD is more closely related to economic conditions. The oil SPD contains information about economic conditions and future security returns that is distinct from the information in the stock index SPD.
Keywords: State price density; macroeconomic indicators; crude oil; stock index.
JEL Classification: G12, G13
Suggested Citation: Suggested Citation