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Liquidity, surprise volume and return premia in the oil market

Jonathan Batten (), Harald Kinateder, Peter G. Szilagyi and Niklas Wagner ()

Energy Economics, 2019, vol. 77, issue C, 93-104

Abstract: We investigate oil market price dynamics in the context of the Mixture of Distributions Hypothesis (MDH). Our econometric model addresses autoregressive properties in returns, the impact of surprise volume and conditional oil market return volatility as well as oil market liquidity in the conditional return equation. Surprise volume as a proxy of private information flow is shown to be unrelated to a set of standard market liquidity proxies. Oil return heteroscedasticity is found to be partly explained by surprise volume, a finding that is consistent with the MDH. Our findings further show that both oil market liquidity as well as surprise volume shocks are priced in the oil market. As such, lower levels of lagged market liquidity relate to above average conditional returns. Surprise volume shocks are associated with lower conditional oil market returns jointly with higher contemporaneous conditional return volatility. Lagged market liquidity dominates conditional volatility in predicting conditional oil price returns.

Keywords: ARCH; Asymmetric volatility; Brent oil; Liquidity premium; Market liquidity; Mixture of distributions; Return volume dependence; Risk premium; Surprise volume; Trading volume; West Texas Intermediate oil (search for similar items in EconPapers)
JEL-codes: C13 F2 F36 G10 G15 (search for similar items in EconPapers)
Date: 2019
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