Prices and Volatilities of Oil Markets in 2020: Back to Bachelier

Financial markets face occasional shocks, which may come from geopolitical, economic, financial or other sources. In this paper, we consider the reaction of financial markets to the onset of severe conditions in the aftermath of Feb. 15, 2020. In particular, we analyze the primary and derivative markets for equities and WTI (West Texas Intermediate) crude-oil futures contracts. We consider these effects in two ways. First, we quantitatively document the impact of the first two months in these markets, as well as the onset of conditions that conditionally anticipate a recovery. Second, motivated in part by the decline of the WTI futures contract into negative territory for one trading day, for the derivative markets on oil futures we consider an analytical contrast between the traditional Black model and its long-ago predecessor, the Bachelier model. Under crash conditions Bachellier model performs better than Black, showing much flatter smile and a weaker Samuelson.