Economic Determinants of Oil Futures Volatility: A Term Structure Perspective
Christina Nikitopoulos-Sklibosios () and
Marcel Prokopczuk ()
No 401, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney
To assess the economic determinants of oil futures volatility, we firstly develop and estimate a multi-factor oil futures pricing model with stochastic volatility that is able to disentangle long-term, medium-term and short-term variations in commodity markets volatility. The volatility estimates reveal that in line with theory, the volatility factors are unspanned, persistent and carry negative market price of risk, while crude oil markets are becoming more integrated with financial markets. After 2004, short-term volatility is driven by industrial production, term and credit spreads, the S&P 500 and the US dollar index, along with the traditional drivers including hedging pressure and VIX. Medium-term volatility is consistently related to open interest and credit spreads, while after 2004 oil sector variables such as inventory and consumption also impact this part of the term structure. Interest rates mostly matter for long-term futures price volatility.
Keywords: oil market; volatility; term structure; macroeconomy (search for similar items in EconPapers)
JEL-codes: C58 G12 G13 Q40 (search for similar items in EconPapers)
Pages: 46 pages
New Economics Papers: this item is included in nep-ene and nep-rmg
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Journal Article: Economic determinants of oil futures volatility: A term structure perspective (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:401
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