Oil Futures Volatility and the Economy

Thu, 01/08/2019 - 12:30pm

Christina Nikitopoulos, University of Technology Sydney


Commonwealth Bank, Level 19, Darling Park Tower 1, 201 Sussex Street, Sydney NSW 2000


Oil futures volatility plays an important role in the global economy. To assess this contribution, we first develop and estimate a multi-factor oil futures pricing model with stochastic volatility which 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 of futures prices is driven by industrial production, credit spreads and the US dollar index, along the traditional drivers of hedging pressure and VIX. Medium-term volatility is consistently related to open interest and credit spreads, while oil sector variables such as inventory and consumption have a measurable impact after 2004 due to significant structural changes in the economy and the oil sector. Interest rates matter mostly for the long-term futures price volatility.

PAPER: Kang, Boda and Sklibosios Nikitopoulos, Christina and Prokopczuk, Marcel, Oil Futures Volatility and the Economy (July 10, 2019). Available at SSRN


Christina Nikitopoulos is a senior lecturer at UTS and a core member of the Quantitative Finance Research Centre. Christina holds a PhD from UTS (2005) for work on term structure models under jump-diffusions. Her main research interests include commodity finance, pricing and hedging derivatives, and interest rate and credit risk modelling. She has published in leading finance journals including the Journal of Banking & Finance, Energy Economics, The Journal of Futures Markets, Quantitative Finance and Applied Mathematical Finance. She is the recipient of two Australian Research Council (ARC) grants. Christina has an extensive experience in teaching derivatives and risk management, derivatives pricing, investments and interest rate modelling.

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