After the financialization of commodity futures markets in 2004–2005 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 versus 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. We also find that increases in oil price uncertainty predict tightening funding constraints of financial intermediaries suggesting a link between oil volatility risk and the stock market.

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Oil Volatility Risk and Expected Stock Returns

A closer look into the global determinants of oil price volatility

Mild explosivity in recent crude oil prices

Impact of the global financial crisis on the crude oil market

Global financial uncertainties and China’s crude oil futures market: Evidence from interday and intraday price dynamics

We investigate price volatility in the West Texas Intermediate (WTI) and Brent crude oil markets between 2000 and 2014. We provide empirical evidence of a relationship between the term structure of option-implied volatilities and global macroeconomic conditions, physical market fundamentals (OPEC surplus output capacity, oil storage) and economy-wide financial uncertainty (captured by the equity VIX). Based on public data regarding trader positions in U.S. futures markets, the intensity of oil speculation is statistically insignificant. Unexpected disruptions in the crude oil space are associated with large regression residuals. Our findings suggest that derivatives (“paper”) market contain information on the magnitude and duration of major oil market disruptions.

Fundamentals, Derivatives Market Information and Oil Price Volatility

We analyze empirically what drives market expectations of crude oil price volatility. Between 2000 and 2014, we investigate the links between the term structure of oil option-implied volatilities (IVs) and global macroeconomic conditions, physical market fundamentals (OPEC surplus output capacity, oil storage) and economy-wide financial conditions (captured by the equity VIX). The VIX and the constraints affecting oil output or inventories have statistically and economically significant explanatory power for the short-dated oil IVs and for the WTI IV term structure. After controlling for the VIX, in contrast, macroeconomic variables and a measure of speculative activity based on public data are both insignificant. Our model, which outperforms a benchmark ARIMA specification both in and out of sample, suggests an approach for studying volatility in asset markets that behave as satellites to other markets.

We analyze empirically the drivers of option-implied volatilities (IVs) for major agricultural commodities. We document that forward-looking uncertainty and risk aversion in equity market (jointly captured by the VIX) as well as the state of grain or oilseed inventories (proxied by the net cost of carry for each commodity) have significant impacts on forward-looking volatility in the three largest U.S. agricultural markets: corn, soybeans, and wheat. We also find some evidence that financial speculation has an immediate, but short-lived and negative, impact on IVs. The relative importance of macroeconomic vs. commodity-specific drivers varies across commodities and over time, with VIX shocks having a greater effect on commodity IVs during recessions. The impact of inventory shocks is asymmetrical: (near-)stockouts boost IVs to a greater extent than plentiful stocks moderate IVs.

Jonathan Wallen

Papers

Fundamentals, Derivatives Market Information and Oil Price Volatility

Fundamentals, Derivatives Market Information and Oil Price Volatility

What Drives Volatility Expectations in Grain and Oilseed Markets

Fundamentals, Derivatives Market Information, and Crude Oil Price Swings