An asymmetric volatility analysis of the negative oil price during the first COVID-19 wave

Abstract

For the first time ever, oil futures were negatively priced on April 20, 2020. We modify an investment model to fit the financial markets context of information processing and arrival. It is able to explain a negative price dip. Its joint interpretation with estimates from GARCH models captures some central institutional setups of the market. We show not only storage uncertainty, in particular, due to the pandemic, but especially noise induced by non-cash settlement in combination with financialization to lie at the heart of the threshold-like leverage effect. To avoid negative pricing and collusive behavior, freeriding on this leverage effect, either the possibility of cash settlement or the abolition of hedging trade-at-settlement contracts can be considered by regulators.