The behaviour of energy-related volatility indices around scheduled news announcements: Implications for variance swap investments

Abstract

This paper investigates the effect of scheduled news announcements on two energy-related volatility indices calculated by the Chicago Board of Options Exchange. These volatility indices are the crude oil volatility index (OVX) and the energy sector volatility index (VXXLE), which measure the market's expectation of 30-day volatility of crude oil prices and energy sector returns, respectively. We find that energy-related volatility indices tend to fall following several US macroeconomic news releases and OPEC meetings. Put differently, these news releases resolve investors' uncertainty about the future development of energy-related markets. Our results also suggest that macroeconomic releases and oil-related events do not seem to exert significantly different impacts on energy market uncertainty. We further document that the observed announcement day patterns cannot be exploited to generate significant returns using variance swaps once we incorporate transaction costs. Our findings are relevant because there are currently no other volatility derivatives traded in exchange markets, such as options or futures, that offer investors pure exposure to energy-related volatility alone as variance swaps do.