Leverage vs. feedback: Which Effect drives the oil market?

- Role played by implied volatility on the WTI crude oil price.
- Inverse leverage effect is dominant in WTI prices.
- Existence of regular and inverted feedback effects.
- Fear of oil consumers to face rising oil prices.
- Hedging strategies for traders, risk- and fund-managers.

This article brings new insights on the role played by (implied) volatility on the WTI crude oil 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 central to any type of trading strategy based on futures and options on the OVX implied volatility index. It is of interest to traders, risk- and fund-managers.