State Oil Fund Research Articles

The role of investors’ fear in crude oil volatility forecasting

We study whether investors’ fear can predict oil price volatility. The proxies used for investors’ fear are the CBOE Crude Oil Volatility Index (OVX), Google searches for “oil price”, and United States Oil Fund (USO) trading volume. In the in-sample analysis, we find that increased OVX, increased Google searches, and increased trading volume predict increased oil price volatility. Additionally, we find bidirectional Granger-causalities between volatility and OVX, volatility and Google searches, and volatility and trading volume. However, results are very different for the out-of-sample forecasts. We incorporate OVX, Google searches for “oil price”, trading volume, and their combinations into commonly used volatility models but find that these variables or their combinations improve none of the models in terms of out-of-sample forecasting.

Intraday and overnight tail risks and return predictability in the crude oil market: Evidence from oil-related regular news and extreme shocks

This study examines the possible impacts of various market shocks, covering oil-related regular news releases and extreme shocks on the intraday and overnight variations in tail risk and intraday return predictability in the crude oil market using high-frequency United States Oil Fund (USO) data from April 10, 2008, to May 10, 2022. First, we find that both regular news and extreme shocks significantly impact the distribution of tail risk during daytime trading and overnight non-trading sessions, with the latter showing stronger effects. Second, extreme shocks have a greater impact on intraday return predictability, with most market shocks obliterating the predictive power of first half-hour returns. Third, the predictability of the first half-hour returns comes primarily from the market opening session from 9:30 am to 10:00 am, and overnight returns lose their predictability. These results have important implications for both market participants and policymakers.

Carr and Wu’s (2020) framework in the oil ETF option market

This paper studies the information inferred from the Carr and Wu’s (2020) formula based on a new option pricing framework in the United States Oil Fund (USO) options. We first document the term structure and dynamics of the risk-neutral variance and covariance rates which lead to a “U”-shaped implied volatility smile with a positive curvature. We then investigate the return predictability of the innovations in the risk-neutral variance and covariance rates (DRNV and DRNC) and their term structures (TRNV and TRNC) and find that DRNC is a significant and robust predictor to forecast daily, weekly and monthly USO excess returns in both statistical and economic terms based on in-sample and out-of-sample tests.

Time-varying price dynamics of clean and dirty energy portfolios

This paper investigates the dynamic relationships between four key instruments related to clean and dirty energy assets: WTI futures, United States Oil Fund (USO), EnergySelect Sector SPDR Fund (XLE), and iShares Global Clean Energy ETF (ICLN). Econometric tests confirm a long-term relationship between all variables, with causality tests showing that clean energy ETF has a causal influence on most instruments. However, the causal patterns are not definitively interpretable in an economic framework. Moreover, using wavelet-based tests on a 1-min interval transaction dataset, we further find convergence delay between WTI and XLE, and to a lesser extent, USO, but not ICLN. This suggests that clean energy has the potential to be a distinct asset class. We also identify the time scales at which arbitrage opportunities and liquidity movements occur: 32–256 and 4–8 min, respectively. These are new stylized facts about clean and dirty energy market assets and contribute to the limited literature available on high-frequency dynamics in the said markets.

The Impact of Azerbaijan’s Oil Strategy on Economic Growth: Analysis and Diagnosis

The article considers the balance of hydrocarbon resources controlled by Azerbaijan, which gained independence in the 1990s, the extent of their utilization, and the potential that can be harnessed within our country’s existing capabilities, given the need to develop a qualitatively new oil strategy. In particular, in order to attract available resources into economic circulation, Azerbaijan signed the “Deal of the Century” with the world’s leading foreign oil companies due to a lack of sufficient financial, scientific−technical, technical−technological, investment−innovation potential for extracting and transporting oil from the deep seabed. Further, it assesses and rates in light of global experience and country reality concerning the effective use of oil money, and the structure of revenues and expenditures of the State Oil Fund of Azerbaijan (SOFAZ) for 2001−2021 is examined using particular materials, taking into consideration the multiplier impact. The analysis is used to examine the role of transfers to the state budget in ensuring macroeconomic stability, strengthening financial provisions for economic growth, improving the national economy’s structure, and regional development, and concludes that the oil strategy implemented in our country will ensure long−term, dynamic economic growth. Then, using quarterly data for 2003Q03-2021Q01, this article examines the impact of transfers from the State Oil Fund to the state budget on GDP, in other words, the long-term and short-term relationships between these variables. In this research, the ARDL model was used to assess co−integration and short−term relationships. In addition, this study used the FMOLS, DOLS, and CCR co−integration equations to explore long−term coefficients between variables. Granger causation tests were performed, Granger causation analysis was assessed using the Wald test (short−term or weak causation, long−term causation, and both short−term and long−term causation or strong causal relationship). The study put forward a hypothesis about the impact of transfers on GDP. This hypothesis was confirmed.

Sovereign funds: features of their formation and use in the Russian Federation and foreign countries

In this article, the author analyzes the features of several types of sovereign funds in different countries. SWF management acts as the main income of the countries. Since the National Wealth Fund is the main sovereign fund in Russia, the author considers it appropriate to analyze the formation of the fund through the management of sovereign wealth funds in other countries. The article provides a classification of sovereign wealth, according to the theoretical provisions developed by E.A. Levchenko. The author notes that often sovereign funds can perform several functions at once. This is typical for funds in countries such as Kuwait, Norway, and also for the state of Alaska. Further, the author proceeds to consider the State Oil Fund of Norway, the Pension Fund of Norway, highlights their functions and areas of use of their funds. The article emphasizes that the funds of the Pension Fund for the most part can be used to achieve such goals as compensating for a budget deficit or adjusting budget revenues from generation to generation. The author then proceeds to consider the funds of Alaska: the Alaska Permanent Fund and the Constitutional Reserve Budget. It is noted that the directions of use of the funds are determined annually by the governor and the legislature of the state. Also in the article, special attention is paid to the Kuwait Oil Fund. In the final part of the article, the author provides statistical data on the return on the use of the Norwegian Pension Fund, on the shares of return on types of assets, as well as on the distribution of investments from the Alaska Permanent Fund.

Republic of Azerbaijan: Technical Assistance Report-Government Finance Statistics Missions (May 17-21 and July 22-August 4, 2021)

Following the launch of the Caucasus, Central Asia, and Mongolia Regional Capacity Development Center (CCAMTAC) in February 2021, and in response to a request from the Azerbaijani authorities to support their statistical capacity development (CD) in government finance statistics (GFS), a series of technical assistance (TA) missions took place remotely (via Zoom meeting platform) during May 17−21 and July 22−August 4, 2021. Both missions were conducted by Mr. Roderick O’Mahony (GFS expert), who worked with the staff of the Ministry of Finance’s Medium-Term Expenditure Framework (MTEF) Development Center as the main counterparts. He also met with other relevant agencies, including the State Oil Fund of the Republic of Azerbaijan (SOFAZ), the State Employment Agency, and the State Social Protection Fund.1

COVID-19 Pandemic and Azerbaijan’s Economy: Policy Lessons In Hard Times

Any fluctuation in oil prices and supply has a direct effect on Azerbaijan’s economy. The government has started the implementation of several state programs to diversify its economy and to develop the non-oil sectors, using energy revenues. COVID-19 has broken out in such a period that the oil prices were already low. The Second Karabakh War has complicated impacts of the pandemic. Facing health, military and economic problems, Azerbaijan has fought on three different fronts. This study evaluates the effects of the pandemic on Azerbaijan’s economy, suggesting that it will affect the oil and gas industry negatively in near future. It is argued that in a long term, the state will be pushed to restructure and transform the economy, to increase the share of the non-oil sectors and to open more space for renewable energy sources, taking advantage of the incomes of The State Oil Fund.

Predicting the Use of Land Resources and Planning Issues

Prognostication and planning of proper using of soil resources is essential for any country especially for developing country like Georgia. Economic development of the country totally depends on rational and effective organization and use of soil resources potential. It significantly determines the role and functions of prognostication and planning of land ownership and pluralistic forms conditions. The author on basis of her scientific research suggests her own proposals for prognostication and planning of soil resources of Georgia. Forecasting and planning process is complex and includes various types of forecasting, such as: social, economic, environmental, demographic, etc. Predicting the use of land resources is based on scientific calculations on the possibility of using the resources. As for planning, it reflects the prospects for the use of land resources. Land is a national treasure and its rational and efficient use is of strategic importance. Predicting and planning the use of land resources during the transition to market relations in the country was not given due attention. Accounting and registration of land resources is still unregulated. Production of the State Land Fund balance has been suspended since 2005. Therefore, changes in the structure of the land fund, including structural transformational changes in agricultural land, are not specified. During the period of economic reforms, the tendency of misuse of land was revealed. The severe social background in the country has contributed to the deteriorating demographic situation. In fact, the system of training qualified personnel has collapsed. The socio-economic situation of the country should be taken into account when planning the use of land resources. In particular, the reasons that led to the existing acute socio-economic problems, including the sharp reduction of agricultural land areas, should be studied. Rational and efficient use of agricultural lands should always be a priority for the development of the country. It depends not only on the food security of the population of the country, but also on the formation of the sectoral structure of the national economy (development of adjacent sectors of agricultural production, etc.). The article offers suggestions (recommendations) on improving the forecasting and planning of land use in Georgia. Keywords: Prognosis; Planning; Complexity; Consolidation; General scheme; State soil fund.

Does the COVID19 pandemic change the relationship between government expenditures and economic growth in Azerbaijan?

This paper investigates the impact of the Government's capital and current expenditures on economic growth in Azerbaijan. The estimation strategy of the research consists of two directions. First, all estimation approaches were used for the period of 2005Q1-2019Q4. The estimated model for this period is called Model 1. Second, the model which is called Model 2 was estimated for whole period of 2005Q12021Q1. This approach allows comparing the role of the Government expenditures on non-oil economic activity in normal times and during the COVID-19 pandemic in Azerbaijan. Estimations show that coefficients characterizing the impact of Government current expenditures and capital expenditures on non-oil economic growth are almost the same for both periods. Therefore, we can state that COVID-19 pandemic did not affect the structure of the relationship between Government expenditures and non-oil economic growth. Results show that 1 percent increase in capital and current expenditures of state budget increases the real non-oil GDP by 0.10 and 0.40 percentage points, respectively. Accordingly, both capital and current expenditures of the state budget have positive impact on the real non-oil GDP growth for the both periods. This is in contrast to findings in the literature, which argue that increasing current expenditures financed by tax hikes lead to a lagged decrease in private investment, having an overall negative impact on economic growth. We attribute this opposing finding to the Azerbaijani state budget revenue system, which is financed by transfers from the State Oil Fund (Stabilization Fund). Thus, large government investment and social projects mostly rely on non-tax sources. Therefore, we argue that positive impact of capital and current expenditures of government budget on non-oil GDP seems plausible for Azerbaijan. Another result of our estimation is that expansion of economic openness accompanied by non-oil economic growth plunge in Azerbaijan. We interpret this phenomenon with very low share of non-oil export, where openness is mostly caused by increase in import volume.

United States Oil Fund volatility prediction: the roles of leverage effect and jumps

United States Oil Fund volatility prediction: the roles of leverage effect and jumps

Volatility Transmission from Equity, Bulk Shipping, and Commodity Markets to Oil ETF and Energy Fund—A GARCH-MIDAS Model

Oil continues to be a major source of world energy, but oil prices and funds have experienced high volatility over the last decade. This study applies the generalized autoregressive conditional heteroskedasticity-mixed-data sampling (GARCH-MIDAS) model on data spanning 1 July 2014 to 30 April 2020 to examine volatility transmission from the equity, bulk shipping, commodity, currency, and crude oil markets to the United States Oil Fund (USO) and BlackRock World Energy Fund A2 (BGF). By dividing the sample into two subsamples, we find a significant volatility transmission from the equity market to the oil ETF and energy fund both before and after the 2018 U.S.–China trade war. The volatility transmission from the bulk shipping, commodity, and crude oil markets turns significant for the oil ETF and energy fund after the 2018 U.S.–China trade war, extending into the COVID-19 pandemic in early 2020. The results suggest that investors can use the equity market to predict the movement of oil and energy funds during both tranquil and turmoil periods. Moreover, investors can use bulk shipping, commodity, and crude oil markets in addition to the equity market to forecast oil and energy funds’ volatility during the turmoil periods. This paper benefits investors against the high volatility of the energy funds.

ОРГАНИЗАЦИЯ БИЗНЕС-ДЕЯТЕЛЬНОСТИ СОВМЕСТНЫХ ПРЕДПРИЯТИЙ В АЗЕРБАЙДЖАНЕ И ИХ РОЛЬ В РЕАЛИЗАЦИИ ЦЕЛЕВЫХ И СОЦИАЛЬНЫХ ПРОЕКТОВ

Based on longterm statistical and primary reporting data, the article examines and evaluates the impact of the results of business activities of enterprises, including joint ventures operating in the oil and gas industry of Azerbaijan, on the implementation of targeted and social projects both in the republic and in foreign countries. The activities of similar structural units are analyzed, and the results of business activities of joint ventures in the oil industry are obtained. At the same time, special attention is paid to the analysis of the results of business activities of the studied enterprises. The content of the implementation of targeted and corporate social projects is disclosed, as well as the issues of the formation of income of the State Oil Fund, the allocation of funds from it for the implementation of a wide network of social infrastructure facilities, social events and maintenance of intellectual property. The key aspects of SOCAR’s activities on the expansion of the foreign market were considered. Specific target projects of SOCAR in different countries of the world have been analyzed. The potential and dynamics of the number of employees of SOCAR joint companies and their main financial indicators are shown. The essence and significance of the implementation of corporate social projects that contribute to raising the company’s image among the population of the country and in the world community are revealed. The necessity of developing and implementing larger investment and innovation projects in the context of new global challenges and requirements has been substantiated. The expediency of expanding the activities of SOCAR and its subsidiaries abroad in the short and long term was considered. The importance of SOCAR’s activities in solving social and economic problems of the population and enhancing the development of the country’s economy is revealed. The efficiency of SOCAR joint ventures in solving multifunctional tasks facing this large company in the modern period was noted. A number of recommendations were prepared and a group of substantiated proposals for organizing business activities of joint ventures in Azerbaijan was presented, their role in the implementation of targeted and social projects was disclosed.

Intraday Momentum and Return Predictability: Evidence from the Crude Oil Market

Intraday return predictability has firstly been identified in the equity markets, and we extend the analysis to the crude oil market by using high-frequency United States Oil Fund data from 2006 to 2018. We find a different intraday prediction pattern in the oil market, where only the first half-hour returns positively predict the last half-hour returns. A market timing strategy based on the findings generates substantial profits. We further decompose the first half-hour return into the overnight and the open half-hour components, and find that the former contains more predictive information. Economic mechanisms of the infrequent portfolio rebalancing and the presence of late-informed investors explain our findings. Notably, unlike equity markets, the oil market exhibits a unique intraday trading volume pattern, caused by the release of two routine oil inventory announcements. However, the information contained in the inventory announcements does not offer predictability to the last half-hour returns.

Intraday momentum and return predictability: Evidence from the crude oil market

Intraday return predictability has firstly been identified in the equity markets, and we extend the analysis to the crude oil market by using high-frequency United States Oil Fund data from 2006 to 2018. We find a different intraday prediction pattern in the oil market, where only the first half-hour returns positively predict the last half-hour returns. A market timing strategy based on these findings generates substantial profits. We further decompose the first half-hour return into its overnight and open half-hour components and find that the former contains more predictive information. The economic mechanisms of infrequent portfolio rebalancing and the presence of late-informed investors explain our findings. Notably, unlike equity markets, the oil market exhibits a unique intraday trading volume pattern due to the release of two routine oil inventory announcements. However, the information contained in the inventory announcements does not offer predictability for the last half-hour returns.

Simulating and modelling the DAX index and the USO Etf financial time series by using a simple agent‐based learning architecture

AbstractThis work presents an extensive case study on modelling the DAX (Deutscher Aktienindex) index and United States Oil Fund (USO) exchange‐traded fund (Etf) time series with the financial agent‐based system learning financial agent‐based simulator (L‐FABS) that exploits simulated annealing as a learning method. The USO Etf time series is highly correlated with oil price behaviour, and the DAX index is based on the weighted and accumulated behaviour of the share prices of some of the largest companies traded on the Frankfurt Stock Exchange. These two time series are driven by completely different economic factors and thus provide two diverse empirical settings to evaluate the effectiveness of our methodology. Our experimentation shows that a relatively simple computational representation of real financial markets is effective in capturing the overall behaviour of the time series with varying approximation levels while the prediction target is moved into the future. The reported experimental investigation of L‐FABS shows that it is robust notwithstanding the learning method used and the data sets exploited. L‐FABS indeed produced a relatively low approximation error in several settings even when evaluated with respect to other modelling approaches, for example, 0.88% and 1.61% errors on average for 1 day ahead experiments in, respectively, DAX index and USO Etf.

Understanding the Negative Pricing of the NYMEX WTI Crude Oil May 2020 Futures Contract

Energy market pundits blamed United States Oil fund (USO), the largest WTI crude oil exchange traded fund, for the negative pricing of the May 2020 contract (known as CLK20) observed on April 20, 2020. Using Granger-causality tests, this article shows that USO influenced neither the price of CLK20, nor the price of any other WTI contracts it ever traded. We argue that a disastrous blend of macroeconomic and geopolitical conditions, such as a rising supply triggered by geopolitical tensions concurrent with a demand shattered by Covid-19 lockdowns, provoked a super-contangoed WTI futures market. The steep upward-sloping term structure of WTI futures prices, in turn, led to a spree of cash-and-carry arbitrages that depleted the spare storage capacity at Cushing. The realization of this capacity blowout induced a panic selling amongst long CLK20 investors that eventually lead to the negative pricing.

Цифровая экономика в проекции экономической модели развития: реалии Республики Азербайджан

At present, not only the formation of the VI technological order is occurring, but also the transition to a network model for the development of the world economy, a specific feature of which is virtualization. This is the objective reality of our time, to which all countries are forced to adapt, taking it for granted, coexisting in a single digital space. The article explores the economic model and identifies patterns of economic development in Azerbaijan in the postSoviet period. The experience of digitalization of the economy is studied on the basis of public administration, the key factors for the development of the Azerbaijani economy are formulated, the perspective direction of using digital technologies within the framework of the existing economic development model is substantiated. A hypothesis is the assumption that it is necessary to use blockchain technology to increase the efficiency of the oil and gas sector, which forms a significant part of the state budget revenues, more than 50% of which are transfers from the State Oil Fund of the Republic of Azerbaijan.

State Oil Fund of Azerbaijan: Huge Spending and Overwhelming Poverty

The State Oil Fund of Azerbaijan is preparing for its 20th anniversary. However, there is nothing to celebrate: despite huge spending, the country’s role as an economic leader in the region is declining and people are suffering from poverty and poor social services. Oil and gas revenues have brought neither improved welfare nor democracy to Azerbaijan.

Volatility-of-Volatility Risk in the Crude Oil Market

Under the stochastic volatility-of-volatility framework, we show that oil volatility-of-volatility risk is a significant pricing factor for cross-sectional delta-hedged gains constructed from 1-month United States Oil Fund (USO) options, and is negatively priced. Moreover, oil volatility-of-volatility risk can significantly and negatively predict one-period ahead delta-hedged option gains. The findings are robust after implementing several tests such as controlling for jump risk measures, another measure of oil volatility-of-volatility and delta-hedged gains constructed from 1-week USO options. The information content of oil volatility-of-volatility is also distinctive from its equity counterpart, which can contribute to predicting the future real personal consumption expenditure.