Evidence of unspanned stochastic volatility in crude-oil market

The purpose of this paper is to conduct a comprehensive analysis of unspanned stochastic volatility in commodity markets with focus and empirical evidence on crude-oil market. Using crude-oil futures and options on futures data from New York Mercantile Exchange (NYMEX) there are presented model-free results that strongly suggest the presence of unspanned stochastic volatility in the crude-oil market. Sharp oil prices changes exert influence on macroeconomic activity in general and crude-oil industry in particular. The importance of the results is that they show the extent to which volatility risk is spanned by the futures contracts. The extent to which crude-oil futures contracts trading span volatility will indicate if options on futures are redundant securities or there is needed a mixed strategy combining both types of crude-oil market derivatives (futures and options) to fully hedge against volatility risk.