Leverage vs. Feedback: Which Effect Drives the Oil Market?
15 Pages Posted: 24 Jul 2012
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Evaluating the Empirical Performance of Alternative Econometric Models for Oil Price Forecasting
By Matteo Manera, Chiara Longo, ...
-
Assessing the Factors Behind Oil Price Changes
By Stephane Dees, Audrey Gasteuil, ...
-
Physical Market Determinants of the Price of Crude Oil and the Market Premium
-
What Can Be Said About the Rise and Fall in Oil Prices?
By Victoria Saporta, Merxe Tudela, ...
-
Energy and Emissions: Local and Global Effects of the Rise of China and India
-
Oil Price Forecast Evaluation with Flexible Loss Functions
By Andrea Bastianin, Matteo Manera, ...
-
The Fundamental and Speculative Components of the Oil Spot Price: A Real Option Value Approach
-
Multi Model Forecasts of the West Texas Intermediate Crude Oil Spot Price
By Martin Emery, Laura Ryan, ...