TY - JOUR

T1 - Economic Determinants of Oil Futures Volatility

T2 - A Term Structure Perspective

AU - Kang, Boda

AU - Nikitopoulos, Christina Sklibosios

AU - Prokopczuk, Marcel

N1 - Funding Information: We thank the editor Richard S.J. Tol, two anonymous reviewers, the late Carl Chiarella, Susan Thorp, Erik Schl?gl, Yubo Tao (discussant), and Isabel Figuerola-Ferretti (discussant) for useful comments at various stages of this research. We also thank seminar participants at the 2019 Sydney Financial Mathematics Workshops (Sydney), the Commodity and Energy Markets Conference 2019 (Pittsburgh), the 3rd Australasian Commodity Markets 2019 conference (Sydney) and the UTS Finance Department internal research seminars and showcase events for fruitful discussions and suggestions. Special thanks go to Mesias Alfeus and Nihad Aliyev for assisting with data management and numerics. Australian Research Council financial support (DP 130103315) is gratefully acknowledged. The usual disclaimer applies.

PY - 2020/5

Y1 - 2020/5

N2 - 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.

AB - 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.

KW - Macro-economy

KW - Oil market

KW - Term structure

KW - Volatility

UR - http://www.scopus.com/inward/record.url?scp=85083298955&partnerID=8YFLogxK

U2 - 10.1016/j.eneco.2020.104743

DO - 10.1016/j.eneco.2020.104743

M3 - Article

AN - SCOPUS:85083298955

VL - 88

JO - Energy Economics

JF - Energy Economics

SN - 0140-9883

M1 - 104743

ER -