Prices and Volatilities of Oil Markets in 2020: Back to Bachelier

24 Pages Posted: 6 Jan 2021

See all articles by Roza Galeeeva

Roza Galeeeva

NYU Finance and Risk Engineering

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Date Written: September 20, 2020

Abstract

Financial markets face occasional shocks, which may come from geopolitical, economic, financial or other sources. In this paper, we consider the reaction of financial markets to the onset of severe conditions in the aftermath of Feb. 15, 2020. In particular, we analyze the primary and derivative markets for equities and WTI (West Texas Intermediate) crude-oil futures contracts. We consider these effects in two ways. First, we quantitatively document the impact of the first two months in these markets, as well as the onset of conditions that conditionally anticipate a recovery. Second, motivated in part by the decline of the WTI futures contract into negative territory for one trading day, for the derivative markets on oil futures we consider an analytical contrast between the traditional Black model and its long-ago predecessor, the Bachelier model. Under crash conditions Bachellier model performs better than Black, showing much flatter smile and a weaker Samuelson.

Keywords: 2020 oil markets, 2020 equity markets, derivatives, crush, volatility, skew, Samuelson

JEL Classification: C01, C02, G12, G13

Suggested Citation

Galeeeva, Roza and Ronn, Ehud I., Prices and Volatilities of Oil Markets in 2020: Back to Bachelier (September 20, 2020). Available at SSRN: https://ssrn.com/abstract=3696081 or http://dx.doi.org/10.2139/ssrn.3696081

Roza Galeeeva (Contact Author)

NYU Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

Ehud I. Ronn

University of Texas at Austin - Department of Finance ( email )

Graduate School of Business
Austin, TX 78712
United States
512-471-5853 (Phone)
512-471-5073 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
31
Abstract Views
207
PlumX Metrics