Department of Economics and Business Economics

Oil volatility risk and expected stock returns

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

  • Peter Frederik Christoffersen, University of Toronto, Copenhagen Business School. CBS
  • ,
  • Xuhui (Nick) Pan, Tulane University, USA, United States

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
IssueOctober
Pages (from-to)5-26
Number of pages22
ISSN0378-4266
DOIs
Publication statusPublished - Oct 2018

    Research areas

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

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