Liquidity, surprise volume and return premia in the oil market

We investigate oil market price dynamics in the context of the Mixture of Distributions Hypothesis (MDH). Our econometric model addresses autoregressive properties in returns, the impact of surprise volume and conditional oil market return volatility as well as oil market liquidity in the conditional return equation. Surprise volume as a proxy of private information flow is shown to be unrelated to a set of standard market liquidity proxies. Oil return heteroscedasticity is found to be partly explained by surprise volume, a finding that is consistent with the MDH. Our findings further show that both oil market liquidity as well as surprise volume shocks are priced in the oil market. As such, lower levels of lagged market liquidity relate to above average conditional returns. Surprise volume shocks are associated with lower conditional oil market returns jointly with higher contemporaneous conditional return volatility. Lagged market liquidity dominates conditional volatility in predicting conditional oil price returns. (C) 2018 Elsevier B.V. All rights reserved.