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Exploring Oil Price Dynamics: Stock Correlations and Jump Analysis

Delve into the correlation and jump patterns in oil stock prices, examining data from 1987 to analyze trends on various observed days. Explore the impact of significant events on price movements and conduct regression analysis to understand correlations more deeply. Utilize Probit models and Realized Variance calculations to forecast volatility in the oil industry. Investigate the interplay between companies like XOM, CVX, and COP to gain insights into market behavior and potential forecasting strategies.

wynne-stanton
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Exploring Oil Price Dynamics: Stock Correlations and Jump Analysis

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  1. Motivational Mathematics (skip) • Data Information • Graphing prices • Motivation for my research • Correlation in stock prices • Correlation in jumps • 11/21/2006 Example • Regression on Z-stats CVX • OLS • Probit • Oil Intro

  2. -rt,j is log return, M is total # of observations per day • Realized Variance • Realized Bi-Power Variation

  3. Sampled at the 5-minute frequency • Sampled from 9/3/2002 to 1/24/2008 for 1343 total observed days • Oil futures data at the 5-min frequency, from 1987 • Changing observations per day • Ticker Symbols • XOM—Exxon Mobile • CVX—Chevron Oil • COP—Conoco Phillips

  4. XOM:29 CVX:41 COP:38

  5. -Correlation between 5-minute prices -XOM had 29 jumps out of 1343 days observed; 6 of which were shared by either CVX or COP -CVX had 41 jumps out of 1343 days observed; 4 of which were shared by either XOM or COP -COP had 38 jumps out of 1343 days observed; 6 of which were shared by either CVX or XOM

  6. -1/13/2003: XOM and CVX -8/12/2003: CVX and COP -9/23/2003: CVX and COP -3/1/2004: XOM and COP -3/5/2004: XOM and CVX -9/14/2004: CVX and COP -9/20/2004: XOM and COP From 9/2/2004 to 9/29/2004: 1 XOM jump, 4 CVX jumps, 3 COP jumps -11/21/2006: XOM and COP, with CVX on 11/22/2006 -From 10/4/2004 to 10/29/2004: 3 XOM jumps, 2 CVX jumps, 2 COP jumps (none on the same day)

  7. -XOM and COP experience price jumps on Tuesday 11/21, with CVX jumping on Wednesday 11/22 -Possible reasons: -On Tuesday, Trans-Alaska pipeline slowed to 25% of normal 800,000 barrel-a-day capacity due to heavy winds -Traders worried about shutdowns at XOM’s Baytown, TX refinery— America’s biggest at 500,000 barrels-a-day -Traders looking to clear up books before Thanksgiving holiday on Thursday -On Wednesday, U.S. Energy Dept releases the information that crude oil inventories swelled by 5.1 million barrels last week -Gunmen in Nigeria seized seven hostages from an Italian supply vessel outside the delta on Wednesday -Price of oil climbs nearly $1 on Tuesday and $.93 on Wednesday

  8. OLS: ZCVX=.253207*ZXOM + .13269*ZCOP + .29 +ei

  9. -Conclusion: We cannot use the results from a Probit model using only dummy variables indicating whether or not a jump occurs.

  10. Probit: Pr(ZCVX>3.09)=Φ(.096*ZCOP + .16491*ZXOM – 2.05) Example: Let ZCOP=mean(ZCOP)~.4849, -if ZXOM increases from 0 to 1, then Pr(ZCVX>3.09) increases by ~10%

  11. Using Crude Oil Futures to check for correlation, checking for co-jumps, introduce into probit model • More familiarity with the practices of the oil industry, especially their trading desk operation to determine how they deal with oil price volatility • Can we use the implied volatility of same industry companies and oil futures to forecast volatility using the HAR-RV-CJ model?

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