The Oil Futures and Options Markets in 2020: The “Message from Marketsâ€

Ehud I. Ronn ()
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Ehud I. Ronn: Department of Finance, McCombs School of Business, University of Texas at Austin, 2100 Speedway Stop B6600, Austin, TX 78712-1276, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2021, vol. 24, issue 04, 1-23

Abstract: This paper considers the response of the equity and oil markets to the onset of crisis conditions after February 15, 2020. Based on derivative markets for equities and WTI (West Texas Intermediate) crude-oil futures contracts, implied equity and oil volatilities quantify the depth of the crisis and contrast it with the previous ones. The estimated Black [(1976) Journal of Financial Economics, 3, 167–179] vol skew and Merton [(1976) Journal of Financial Economics, 3, 125–144] option model parameters are able to discern between demand- and supply-side facets. The time when the futures curve is in contango identifies the beginning and, to date, conclusion of the crisis. Using the CAPM, co-movement of oil and equity prices permits computing forecasts of spot oil prices. In considering these events, we recognize the essential role of prices in financial markets: They are conveyors of information, the “Message from Markets,†in which financial theory proves useful, practical and applicable.

Keywords: Informational content of equity and oil prices; implied equity and oil volatilities; expected spot price of oil (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219091521500302

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