New research shows that analyzing oil futures can help you construct better portfolios.
Peter Christoffersen, professor of finance at the Rotman School of Management, presented this information today at a lunch hosted by Rotman (in partnership with AIMA and PMAC) in Toronto.
He’s found option volatility on oil can predict the overall stock market’s future returns and volatility. By comparing company betas with oil volatility over a given month, he’s found a 66 basis-point excess long-short return.
“The alpha is positive, after taking into account size, value and momentum,” he says. The higher the beta of the company, the lower the returns.
Christoffersen says that while he’s analyzed data from 1990 to 2012, the phenomenon only emerged after 2005. He suspects this is because commodity markets experienced significant reforms between 2004 and 2006, and more investors were able to participate.