Oil Volatility Risk and Expected Stock Returns

Peter Christoffersen, Xuhui (Nick) Pan

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

After the financialization of commodity futures markets in 2004–2005 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 versus 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. We also find that increases in oil price uncertainty predict tightening funding constraints of financial intermediaries suggesting a link between oil volatility risk and the stock market.
Original languageEnglish
JournalJournal of Banking & Finance
Volume95
Pages (from-to)5-26
Number of pages22
ISSN0378-4266
DOIs
Publication statusPublished - Oct 2018

Keywords

  • Option-implied volatility
  • Oil prices
  • Volatility risk
  • Cross-section
  • Factor-mimicking portfolios
  • Financial intermediaries

Cite this

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abstract = "After the financialization of commodity futures markets in 2004–2005 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 versus 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. We also find that increases in oil price uncertainty predict tightening funding constraints of financial intermediaries suggesting a link between oil volatility risk and the stock market.",
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Oil Volatility Risk and Expected Stock Returns. / Christoffersen, Peter; Pan, Xuhui (Nick).

In: Journal of Banking & Finance, Vol. 95, 10.2018, p. 5-26.

Research output: Contribution to journalJournal articleResearchpeer-review

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