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

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Xuhui (Nick) Pan

University of Oklahoma

Date Written: September 22, 2020

Abstract

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

Christoffersen, Peter and Jacobs, Kris and Pan, Xuhui (Nick), The State Price Density Implied by Crude Oil Futures and Option Prices (September 22, 2020). AFA 2016 Meetings Paper Forthcoming, Review of Financial Studies, Available at SSRN: https://ssrn.com/abstract=1988449 or http://dx.doi.org/10.2139/ssrn.1988449

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Xuhui (Nick) Pan (Contact Author)

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

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