Leverage vs. Feedback: Which Effect Drives the Oil Market ?
Résumé
This article brings new insights on the role played by (implied) volatility on the WTI crude
oil spot price. An increase in the volatility subsequent to an increase in the oil price (i.e. inverse
leverage effect) remains the dominant effect as it might reflect the fear of oil consumers to face
rising oil prices. However, this effect is amplified by an increase in the oil price subsequent to
an increase in the volatility (i.e. inverse feedback effect) with a two-day delayed effect. This
lead-lag relation between the oil price and its volatility is determinant for any type of trading
strategy based on futures and options on the OVX implied volatility index, and thus is of interest to traders, risk- and fund-managers.