The Oil Futures and Options Markets in 2020: The “Message from Markets”

2021 ◽  
Author(s):  
Ehud I. Ronn
Keyword(s):  
Financial Economics ◽  
Futures Contracts ◽  
Model Parameters ◽  
Equity Prices ◽  
Oil Futures ◽  
Oil Markets ◽  
Option Model ◽  
Crude Oil Futures ◽  
Crisis Conditions ◽  
Derivative Markets

This paper considers the response of the equity and oil markets to the onset of crisis conditions after February 15, 2020. Based on derivative markets for equities and WTI (West Texas Intermediate) crude-oil futures contracts, implied equity and oil volatilities quantify the depth of the crisis and contrast it with the previous ones. The estimated Black [(1976) Journal of Financial Economics, 3, 167–179] vol skew and Merton [(1976) Journal of Financial Economics, 3, 125–144] option model parameters are able to discern between demand- and supply-side facets. The time when the futures curve is in contango identifies the beginning and, to date, conclusion of the crisis. Using the CAPM, co-movement of oil and equity prices permits computing forecasts of spot oil prices. In considering these events, we recognize the essential role of prices in financial markets: They are conveyors of information, the “Message from Markets,” in which financial theory proves useful, practical and applicable.

A market-augmented model for SIMEX Brent crude oil futures contracts

2000 ◽  
Vol 10 (5) ◽  
pp. 543-552 ◽  
Author(s):  
John M. Sequeira ◽  
Michael McAleer
Keyword(s):  
Crude Oil ◽  
Futures Contracts ◽  
Oil Futures ◽  
Crude Oil Futures

World Leading Commercial Banks in Crude Oil Derivatives Market

2015 ◽  
pp. 69-79
Author(s):  
A. Maslennikov
Keyword(s):  
European Union ◽  
Crude Oil ◽  
Commercial Banks ◽  
Global Market ◽  
Futures Contracts ◽  
Oil Futures ◽  
Oil Derivatives ◽  
The Usa ◽  
Crude Oil Futures ◽  
Commodity Derivatives

The article examines recent developments in the global market for crude oil futures contracts. Amid persistently high trading volume of futures contracts for Brent and WTI global oil benchmarks structure of the market has recently changed profoundly. Share of non-commercial investors who are not directly linked to physical oil operations and are often considered speculators in the trade turnover of futures contracts for WTI at the NYMEX exchange has exceeded 50%. Financial investors play a prominent role in price discovery process for crude oil. However, world leading commercial banks that used to be the major participants in crude oil futures market and were also actively engaged into physical oil trading operations presently are forced to adjust their strategies responding to the regulatory reforms unleashed in the USA and European Union after the global financial crisis of 2008/2009. Provisions of Dodd-Frank Act in the USA and similar regulations in the European Union member countries aim to limit banks’ involvement in commodity derivatives market exclusively to hedging activities referred to swap transactions between banks and their clients. New tighter regulation substantially increases costs of commodity derivatives’ business for commercial banks. Also, the current US legislation prohibits banks from proprietary trading with derivatives instruments. These legislative innovations could substantially reduce banks’ profits. The largest global commercial banks have already reduced their physical commodity trading activities. The author concludes that while it is still unclear how significant the retreat of banks from crude oil derivatives market will be, the established mechanism of oil price setting is unlikely to change dramatically as new players from the financial sector are entering the market, replacing commercial banks.

Trading volume and return relationship in the crude oil futures markets

2014 ◽  
Vol 31 (4) ◽  
pp. 426-438 ◽  
Author(s):  
Saada Abba Abdullahi ◽  
Reza Kouhy ◽  
Zahid Muhammad
Keyword(s):  
Crude Oil ◽  
Information Flow ◽  
Trading Volume ◽  
Futures Markets ◽  
Positive Relationship ◽  
Generalized Method Of Moments ◽  
Oil Futures ◽  
Content Type ◽  
Oil Markets ◽  
Crude Oil Futures

Purpose – The purpose of this paper is to examine the relationship between trading volume and returns in the West Texas Intermediate (WTI) and Brent crude oil futures markets. In so doing, the paper addresses two important issues. First, whether there is a positive relationship between returns and trading volume in the crude oil futures markets. Second, whether information regarding trading volume contributes to forecasting the magnitude of return in the markets, an important issue because the ability of trading volume to predict returns imply market inefficiency. Design/methodology/approach – The paper used daily closing futures price and their corresponding trading volumes for WTI and Brent crude oil markets during the sample period January 2008 to May 2011. Both the log volume and the unexpected component of the detrended volume are used in the analysis in other to have robust alternative conclusion. The generalized method of moments (GMM) approach is used to examine the contemporaneous relationship between returns and trading volume while the Granger causality approach, impulse response and variance decomposition analysis are used to investigate the ability of trading volume to predict returns in the oil futures markets. Findings – The results reject the postulation of a positive relationship between trading volume and returns, suggesting that trading volume and returns are not driven by the same information flow which contradicts the mixture of distribution hypothesis in all markets. The results also show that neither trading volume nor returns have the power to predict the other and therefore contradicting the sequential arrival hypothesis and noise trader model in all markets. Finally, the findings support the weak form efficient market hypothesis in the crude oil futures markets. Originality/value – The findings has important implications to market regulators because daily price movement and trading volume do not respond to the same information flow and therefore the measures that control price volatility should not focused more on volume; otherwise they may not provide fruitful outcomes. Additionally, traders and investors who participate in oil futures should not base their decisions on past trading volume because it will lead to profit loss. The results also have implications for market efficiency as past information cannot assist speculators to forecast returns in all the oil markets. Finally, investors can benefit from portfolio diversification across the two markets.

scholarly journals Forecasting crude oil futures prices using global macroeconomic news sentiment

2019 ◽  
Vol 31 (2) ◽  
pp. 191-215 ◽  
Author(s):  
Zryan A Sadik ◽  
Paresh M Date ◽  
Gautam Mitra
Keyword(s):  
Crude Oil ◽  
Price Volatility ◽  
Futures Contracts ◽  
Model Structure ◽  
Futures Prices ◽  
Macroeconomic News ◽  
Oil Futures ◽  
Crude Oil Futures ◽  
News Sentiment ◽  
The Impact

Abstract We propose a method of incorporating macroeconomic news into a predictive model for forecasting prices of crude oil futures contracts. Since these futures contracts are more liquid than the underlying commodity itself, accurate forecasting of their prices is of great value to multiple categories of market participants. We utilize the Kalman filtering framework for forecasting arbitrage-free (futures) prices and assume that the volatility of oil (futures) price is influenced by macroeconomic news. The impact of quantified news sentiment on the price volatility is modelled through a parametrized, non-linear functional map. This approach is motivated by the successful use of a similar model structure in our earlier work, for predicting individual stock volatility using stock-specific news. We claim the proposed model structure for incorporating macroeconomic news together with historical (market) data is novel and improves the accuracy of price prediction quite significantly. We report results of extensive numerical experiments which justify our claim.

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