A fear index to predict oil futures returns

Authors

  • Julien Chevallier IPAG Business School (IPAG Lab)
  • Benoit Sevi IPAG Business School (IPAG Lab)

DOI:

https://doi.org/10.15173/esr.v20i3.552

Keywords:

Oil Futures, Variance Risk Premium, Forecasting,

Abstract

This paper evaluates the predictability of WTI light sweet crude oil futures by using the variance risk premium, i.e. the difference between model-free measures of implied and realized volatilities. Additional regressors known for their ability to explain crude oil futures prices are also considered, capturing macroeconomic, financial and oil-specific influences. The results indicate that the explanatory power of the (negative) variance risk premium on oil excess returns is particularly strong (up to 25% for the adjusted R-squared across our regressions). It complements other financial (e.g. default spread) and oil-specific (e.g. US oil stocks) factors highlighted in previous literature.

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Published

2014-06-12

Issue

Section

Articles