Oil Volatility Risk and Expected Stock Returns

Peter Christoffersen, Xuhui (Nick) Pan

Research output: Working paperResearch

Abstract

After the financialization of commodity futures markets in 2004-05 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 and 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. In the post-financialization period, oil volatility risk is strongly related with various measures of funding liquidity constraints suggesting an economic channel for the effect.
Original languageEnglish
Place of PublicationAarhus
PublisherAarhus Universitetsforlag
Number of pages54
DOIs
Publication statusPublished - 2015
SeriesCreates Research Paper
Number2015-6
SeriesRotman School of Management Working Paper
Number2399677

Cite this