Oil Futures Volatility and the Economy
68 Pages Posted: 11 Jul 2019
Date Written: July 10, 2019
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,
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