Examination on the Flow Characteristic of Crude Oil: Evidence from the Risk-Neutral Moments

38 Pages Posted: 14 Feb 2015 Last revised: 10 Feb 2018

See all articles by Arjun Chatrath

Arjun Chatrath

University of Portland - Dr. Robert B. Pamplin, Jr. School of Business Administration

Hong Miao

Colorado State University, Fort Collins - Department of Finance & Real Estate

Sanjay Ramchander

Colorado State University, Fort Collins - Department of Finance & Real Estate

Tianyang Wang

Colorado State University - Department of Finance & Real Estate

Date Written: February 12, 2015

Abstract

This paper examines the information content of risk-neutral moments to explain crude oil futures returns. Implied volatility and higher moments are extracted from observed crude oil option prices using a model-free implied volatility framework and the Black-Scholes model. We find a tenuous and time-varying association between returns and implied volatility and its innovations. Specifically, changes in implied volatility are found to be meaningfully associated with crude returns only over the period spanning the recent financial crisis. Overall, results are consistent with prior evidence that crude oil prices are determined primarily in a flow demand/supply environment. Finally, we document that oil risk is priced into the cross-section of stock returns in the oil and transportation sectors.

Keywords: Risk-Neutral Moments, Crude Oil Futures, Returns, Volatility

JEL Classification: G13, G14

Suggested Citation

Chatrath, Arjun and Miao, Hong and Ramchander, Sanjay and Wang, Tianyang, Examination on the Flow Characteristic of Crude Oil: Evidence from the Risk-Neutral Moments (February 12, 2015). Energy Economics, Vol. 54, 2016, Available at SSRN: https://ssrn.com/abstract=2564189 or http://dx.doi.org/10.2139/ssrn.2564189

Arjun Chatrath

University of Portland - Dr. Robert B. Pamplin, Jr. School of Business Administration ( email )

Portland, OR 97203
United States
503-283-7465 (Phone)

Hong Miao

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

Sanjay Ramchander

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States
970-491-6681 (Phone)

Tianyang Wang (Contact Author)

Colorado State University - Department of Finance & Real Estate ( email )

Finance and Real Estate Department
1272 Campus Delivery
Fort Collins, CO 80523
United States

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