Oil Futures Volatility and the Economy

68 Pages Posted: 11 Jul 2019

See all articles by Boda Kang

Boda Kang

Lacima Group

Christina Sklibosios Nikitopoulos

University of Technology Sydney - Business School; Financial Research Network (FIRN)

Marcel Prokopczuk

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: July 10, 2019

Abstract

Oil futures volatility plays an important role in the global economy. To assess this contribution, we first develop and estimate a multi-factor oil futures pricing model with stochastic volatility which is able to disentangle long-term, medium-term and short-term variations in commodity markets volatility. The volatility estimates reveal that in line with theory, the volatility factors are unspanned, persistent and carry negative market price of risk, while crude oil markets are becoming more integrated with financial markets. After 2004, short-term volatility of futures prices is driven by industrial production, credit spreads and the US dollar index, along the traditional drivers of hedging pressure and VIX. Medium-term volatility is consistently related to open interest and credit spreads, while oil sector variables such as inventory and consumption have a measurable impact after 2004 due to significant structural changes in the economy and the oil sector. Interest rates matter mostly for the long-term futures price volatility.

Keywords: oil market, volatility, term structure, macroeconomy

JEL Classification: G12, G13, C58, Q40,

Suggested Citation

Kang, Boda and Sklibosios Nikitopoulos, Christina and Prokopczuk, Marcel, Oil Futures Volatility and the Economy (July 10, 2019). Available at SSRN: https://ssrn.com/abstract=3417706 or http://dx.doi.org/10.2139/ssrn.3417706

Boda Kang

Lacima Group ( email )

Sydney
Australia

Christina Sklibosios Nikitopoulos (Contact Author)

University of Technology Sydney - Business School ( email )

15 Broadway, Ultimo
Sydney 2007, New South Wales
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Marcel Prokopczuk

Leibniz Universit├Ąt Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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