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Leverage vs. Feedback: Which Effect Drives the Oil Market ?

Julien Chevallier and Sofiane Aboura
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Sofiane Aboura: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: This article brings new insights on the role played by (implied) volatility on the WTI crude oil spot price. An increase in the volatility subsequent to an increase in the oil price (i.e. inverse leverage effect) remains the dominant effect as it might reflect the fear of oil consumers to face rising oil prices. However, this effect is amplified by an increase in the oil price subsequent to an increase in the volatility (i.e. inverse feedback effect) with a two-day delayed effect. This lead-lag relation between the oil price and its volatility is determinant for any type of trading strategy based on futures and options on the OVX implied volatility index, and thus is of interest to traders, risk- and fund-managers.

Keywords: Feedback Effect; Leverage Effect; Implied Volatility; Crude Oil; WTI (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (31)

Published in Finance Research Letters, 2013, 10 (3), pp.131-141. ⟨10.1016/j.frl.2013.05.003⟩

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Journal Article: Leverage vs. feedback: Which Effect drives the oil market? (2013) Downloads
Working Paper: Leverage vs. Feedback: Which Effect Drives the Oil Market? (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01531283

DOI: 10.1016/j.frl.2013.05.003

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