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

Author

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  • Sofiane Aboura

    (CEREG - Centre de Recherche sur la gestion et la Finance - DRM UMR 7088 - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Julien Chevallier

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

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.

Suggested Citation

  • Sofiane Aboura & Julien Chevallier, 2012. "Leverage vs. Feedback: Which Effect Drives the Oil Market?," Working Papers halshs-00720156, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00720156
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00720156
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    References listed on IDEAS

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    More about this item

    Keywords

    Leverage Effect; Implied Volatility; Crude Oil Price; WTI; Feedback Effect;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • G1 - Financial Economics - - General Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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