26 Pages Posted: 12 Jul 2013 Last revised: 11 Nov 2016
Date Written: July 11, 2013
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: 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