Economic Determinants of Oil Futures Volatility: A Term Structure Perspective

46 Pages Posted: 11 Jul 2019 Last revised: 17 Mar 2020

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: March 01, 20

Abstract

To assess the economic determinants of oil futures volatility, we firstly develop and estimate a multi-factor oil futures pricing model with stochastic volatility that 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 is driven by industrial production, term and credit spreads, the S&P 500 and the US dollar index, along with the traditional drivers including hedging pressure and VIX. Medium-term volatility is consistently related to open interest and credit spreads, while after 2004 oil sector variables such as inventory and consumption also impact this part of the term structure. Interest rates mostly matter for 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, Economic Determinants of Oil Futures Volatility: A Term Structure Perspective (March 01, 20). 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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