Leverage vs. Feedback: Which Effect Drives the Oil Market?

15 Pages Posted: 24 Jul 2012

See all articles by Sofiane Aboura

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Julien Chevallier

University of Paris 8 Vincennes-Saint Denis

Date Written: July 23, 2012

Abstract

This article brings new insights on the role played by (implied) volatility on the WTI crude oil spot price. An increase in the volatility subsequent to an increase in the oil price (i.e. inverse leverage effect) remains the dominant effect as it might reflect the fear of oil consumers to face rising oil prices. However, this effect is amplified by an increase in the oil price subsequent to an increase in the volatility (i.e. inverse feedback effect) with a two-day delayed effect. This lead-lag relation between the oil price and its volatility is determinant for any type of trading strategy based on futures and options on the OVX implied volatility index, and thus is of interest to traders, risk- and fund-managers.

Keywords: WTI, Crude Oil Price, Implied Volatility, Leverage Effect, Feedback Effect

JEL Classification: C4, G1, Q4

Suggested Citation

Aboura, Sofiane and Chevallier, Julien, Leverage vs. Feedback: Which Effect Drives the Oil Market? (July 23, 2012). Available at SSRN: https://ssrn.com/abstract=2115610 or http://dx.doi.org/10.2139/ssrn.2115610

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management ( email )

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Julien Chevallier (Contact Author)

University of Paris 8 Vincennes-Saint Denis ( email )

Paris
France

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