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Oil volatility risk and expected stock returns

Peter Christoffersen and Pan, Xuhui (Nick)

Journal of Banking & Finance, 2018, vol. 95, issue C, 5-26

Abstract: After the financialization of commodity futures markets in 2004–2005 oil volatility has become a strong predictor of returns and volatility of the overall stock market. Furthermore, stocks’ exposure to oil volatility risk now drives the cross-section of expected returns. The difference in average return between the quintile of stocks with low exposure versus high exposure to oil volatility is significant at 0.66% per month, and oil volatility risk carries a significant risk premium of −0.60% per month. We also find that increases in oil price uncertainty predict tightening funding constraints of financial intermediaries suggesting a link between oil volatility risk and the stock market.

Keywords: Option-implied volatility; Oil prices; Volatility risk; Cross-section; Factor-mimicking portfolios; Financial intermediaries (search for similar items in EconPapers)
JEL-codes: G12 G13 E44 Q02 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Oil Volatility Risk and Expected Stock Returns (2014) Downloads
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