Fundamentals, Derivatives Market Information and Oil Price Volatility

Abstract

We analyze empirically what drives market expectations of crude oil price volatility. Between 2000 and 2014, we investigate the links between the term structure of oil option‐implied volatilities (IVs) and global macroeconomic conditions, physical market fundamentals (OPEC surplus output capacity, oil storage) and economy‐wide financial conditions (captured by the equity VIX). The VIX and the constraints affecting oil output or inventories have statistically and economically significant explanatory power for the short‐dated oil IVs and for the WTI IV term structure. After controlling for the VIX, in contrast, macroeconomic variables and a measure of speculative activity based on public data are both insignificant. Our model, which outperforms a benchmark ARIMA specification both in and out of sample, suggests an approach for studying volatility in asset markets that behave as satellites to other markets. Published 2015. This article is a U.S. Government work and is in the public domain in the USA. Jrl Fut Mark 36:317–344, 2016

Sugar with your Coffee? Fundamentals, Financials, and Softs Price Uncertainty

“…The statistical significance of the VIX is strong at all maturities: the P values are less than two percent for coffee and less than one percent for sugar. Interestingly, the economic significance of the regression coefficient is much smaller for coffee than for sugar, which itself is only half the magnitude of the regression coefficient documented by Robe and Wallen () in the case of crude oil. Put differently, softs market uncertainty levels tend to move together with generalized financial uncertainty (or investor sentiment)—but to a degree that appears inversely related to how key a commodity is to industry.…”

“…When storage facilities are either full to the brim or empty, markets should be more susceptible to exogenous shocks and thus commodity IVols should increase—especially in the near‐term (Cafiero et al, ; Robe & Wallen, , Section 5.2.4). For the same reason, depleted or overflowing inventories should decrease “the relative importance of pricing factors common to commodities and equities”—leading to lower cross‐market correlations (Bruno et al, , Section 5.3).…”

Volatility term structures in commodity markets

“…A potential explanation for this finding is that the equity market reacts in a more timely manner to the changes in the business cycle. Robe and Wallen () observe a similar linkage between the equity markets and crude oil. We observe lagged information transmission to the business cycle sensitive commodity markets.…”

The Lead–Lag Relationship between Oil Futures and Spot Prices—A Literature Review

“…The crude oil market has experienced numerous fluctuations over time, and is considered to be one of the most volatile commodity markets (Oil Price 2018). There are various triggers impacting crude oil prices, with the most influential being supply and demand shocks, business cycles, speculative activities, and economic, financial and political instabilities (Hamilton 2014;Robe and Wallen 2016). For example, the first and second Gulf Wars were caused by political unrests that led to significant oil supply disruptions.…”

“…A key contribution of this study is the critical assessment of existing research that considers how highly volatile crude oil markets can impact economic dynamics due to increasing levels of uncertainty and unexpected oil price jumps. Researchers have offered evidence on how oil price jumps and ambiguity significantly disturb markets with ramifications to the real economy (Bekiros and Diks 2008;Charles and Darné 2009;Salisu and Fasanya 2013;Hamilton 2014;Robe and Wallen 2016) but surprisingly, the analysis of the lead-lag relationship in the context of economic and financial crises is an area of research that has not received sufficient attention. Thus, this literature review seeks to identify the main contributions from the existing body of knowledge by considering four main themes: (1) The long term and short term relationship between spot and futures oil prices; (2) the analysis of structural breaks and their significance to the oil market; (3) oil prices volatility and market implications; and finally (4) oil prices and their behaviour in the context of the Efficient Market Hypothesis of Malkiel and Fama (1970).…”