Model-free moments: predictability of STOXX Europe 600 Oil & Gas future returns

The relationship between prices and volatility of energy assets (primarily oil and gas) is of paramount importance for investors and policy makers. We construct a volatility index for the European oil and gas market based on a model-free approach to obtain a European counterpart of US volatility indices for the energy market, such as the CBOE Crude Oil Volatility Index (OVX). Given that investors are averse to volatility of losses, but appreciate volatility of gains, we also derive risk measures that focus on positive and negative returns and their imbalance. We assess whether the constructed indices have predictive power on future returns. We show that in the medium term all the risk indices behave as market greed indicators, whereas in the short term they behave as fear indicators since rises in risk indices are linked with negative returns. The implications for investors and policy-makers are outlined.