Dynamics between crude oil and equity markets under the risk-neutral measure

Marie-H�l�ne Gagnon, Gabriel Power and Dominique Toupin

Applied Economics Letters, 2015, vol. 22, issue 5, 370-377

Abstract: This article investigates the time series relationship between equity and crude oil markets using option-implied risk-neutral moments. We recover daily time series of constant-maturity risk-neutral volatility (RNV), skewness and kurtosis using options data for the S&P 500 and WTI oil futures over the period January 1996 to October 2011. The transmission of shocks is analysed for each risk-neutral moment using a vector autoregression model where each market is represented by one equation. Impulse response functions and variance decompositions are recovered and analysed. Our contribution is to document the transmission of shocks measured through investor anticipations in both markets. Our results suggest the transmission of shocks measured through investor anticipations is different under the risk-neutral measure than under the physical measure previously studied in the literature. Shocks to equity market RNV and skewness are transmitted to oil RNVand skewness while the reverse is not observed. However, shocks to risk-neutral kurtosis in one market do not affect the other market. The crystallized changes in investor anticipations in equity markets are eventually passed on to oil markets.

Date: 2015
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DOI: 10.1080/13504851.2014.943880

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