The Oil Futures and Options Markets in 2020: The "Message from Markets"

39 Pages Posted: 1 Jun 2021

See all articles by Ehud I. Ronn

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Date Written: May 28, 2021

Abstract

This paper considers the response of the equity and oil markets to the onset of crisis conditions after Feb. 15, 2020. Based on derivative markets for equities and WTI (West Texas Intermediate) crude-oil futures contracts, implied equity and oil volatilities quantify the depth of the crisis and contrast it with previous ones. The estimated Black (1976) vol skew and Merton (1976) option model parameters are able to discern between demand- and supply-side facets. The time when the futures curve is in contango identifies the beginning and, to date, conclusion of the crisis. Using the CAPM, co-movement of oil and equity prices permits computing forecasts of spot oil prices. In considering these events, we recognize the essential role of prices in financial markets: They are conveyors of information, the "Message from Markets," in which financial theory proves useful, practical and applicable.

Keywords: Informational content of equity and oil prices; Implied equity and oil volatilities; Expected spot price of oil

JEL Classification: G12; G13

Suggested Citation

Ronn, Ehud I., The Oil Futures and Options Markets in 2020: The "Message from Markets" (May 28, 2021). Available at SSRN: https://ssrn.com/abstract=3855765 or http://dx.doi.org/10.2139/ssrn.3855765

Ehud I. Ronn (Contact Author)

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)

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