Oil Volatility Risk and Expected Stock Returns

Peter Christoffersen, Xuhui (Nick) Pan

Research output: Contribution to journalJournal articleResearchpeer-review


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
Pages (from-to)5-26
Number of pages22
Publication statusPublished - Oct 2018


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

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