FEEM working papers "Note di lavoro" series
2013 .062

A Fear Index to Predict Oil Futures Returns


Authors: Julien Chevallier, Benoît Sévi
Series: Energy: Resources and Markets
Editor: Giuseppe Sammarco
Keywords: Oil Futures, Variance Risk Premium, Forecasting
JEL n.: C32, G17, Q47

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 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.

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