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An examination of the flow characteristics of crude oil: Evidence from risk-neutral moments

Arjun Chatrath, Hong Miao, Sanjay Ramchander and Tianyang Wang ()

Energy Economics, 2016, vol. 54, issue C, 213-223

Abstract: This paper examines the information content of risk-neutral moments to explain crude oil futures returns. Implied volatility and higher moments are extracted from observed crude oil option prices using a model-free implied volatility framework and the Black–Scholes model. We find a tenuous and time-varying association between returns and implied volatility and its innovations. Specifically, changes in implied volatility are found to be meaningfully associated with crude returns only over the period spanning the recent financial crisis. The results lead us to conclude that crude oil prices are determined primarily in a flow demand/supply environment. Finally, we document that oil risk is priced into the cross-section of stock returns in the oil and transportation sectors.

Keywords: Risk-neutral moments; Crude oil futures; Returns; Volatility (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.eneco.2015.12.005

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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