A Fear Index to Predict Oil Futures Returns

26 Pages Posted: 12 Jul 2013 Last revised: 11 Nov 2016

Julien Chevallier

University of Paris 8 Vincennes-Saint Denis

Benoît Sévi

University of Nantes

Date Written: July 11, 2013

Abstract

This paper evaluates the predictability of WTI light sweet crude oil futures by using the variance risk premium, i.e. the difference between model-free measures of implied and realized volatilities. Additional regressors known for their ability to explain crude oil futures prices are also considered, capturing macroeconomic, financial and oil-specific influences. The results indicate that the explanatory power of the (negative) variance risk premium on oil excess returns is particularly strong (up to 25% for the adjusted Rsquared across our regressions). It complements other financial (e.g. default spread) and oil-specific (e.g. US oil stocks) factors highlighted in previous literature.

Keywords: Oil Futures, Variance Risk Premium, Forecasting

JEL Classification: C32, G17, Q47

Suggested Citation

Chevallier, Julien and Sévi, Benoît, A Fear Index to Predict Oil Futures Returns (July 11, 2013). FEEM Working Paper No. 62.2013. Available at SSRN: https://ssrn.com/abstract=2292496 or http://dx.doi.org/10.2139/ssrn.2292496

Julien Chevallier (Contact Author)

University of Paris 8 Vincennes-Saint Denis ( email )

Paris
France

Benoît Sévi

University of Nantes ( email )

1, quai de Tourville BP
Nantes Cedex 1
Nantes, 44313
France

HOME PAGE: http://www.iemniae.univ-nantes.fr/sevi-b/0/fiche___annuaireksup/

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