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Carr and Wu’s (2020) framework in the oil ETF option market

Xiaolan Jia, Xinfeng Ruan and Jin E. Zhang

Journal of Commodity Markets, 2023, vol. 31, issue C

Abstract: This paper studies the information inferred from the Carr and Wu’s (2020) formula based on a new option pricing framework in the United States Oil Fund (USO) options. We first document the term structure and dynamics of the risk-neutral variance and covariance rates which lead to a “U”-shaped implied volatility smile with a positive curvature. We then investigate the return predictability of the innovations in the risk-neutral variance and covariance rates (DRNV and DRNC) and their term structures (TRNV and TRNC) and find that DRNC is a significant and robust predictor to forecast daily, weekly and monthly USO excess returns in both statistical and economic terms based on in-sample and out-of-sample tests.

Keywords: Crude oil; Risk-neutral covariance; Implied volatility smile; Return predictability; Option pricing (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:31:y:2023:i:c:s2405851323000247

DOI: 10.1016/j.jcomm.2023.100334

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