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Oil Volatility Risk and Expected Stock Returns

Peter Christoffersen and Xuhui (Nick) Pan ()
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Xuhui (Nick) Pan: Tulane University, A.B. Freeman School of Business, Postal: New Orleans, LA 70118, United States

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: After the financialization of commodity futures markets in 2004-05 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 and 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. In the post-financialization period, oil volatility risk is strongly related with various measures of funding liquidity constraints suggesting an economic channel for the effect.

Keywords: option-implied volatility; oil prices; volatility risk; cross-section; factor-mimicking portfolios; financial intermediaries (search for similar items in EconPapers)
JEL-codes: E44 G12 G13 Q02 (search for similar items in EconPapers)
Pages: 54
Date: 2014-12-02
New Economics Papers: this item is included in nep-ene, nep-fmk, nep-mac and nep-rmg
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Citations: View citations in EconPapers (2)

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Journal Article: Oil volatility risk and expected stock returns (2018) Downloads
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