A Fear Index to Predict Oil Futures Returns

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 Rsquared across our regressions). It complements other financial (e.g. default spread) and oil-specific (e.g. US oil stocks) factors highlighted in previous literature.


Issue Date:
2013-06
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/156489
Total Pages:
26
JEL Codes:
C32; G17; Q47
Series Statement:
ERM
62.2013




 Record created 2017-04-01, last modified 2017-08-27

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