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Crude oil price and implied volatility

Crude oil price and implied volatility The purpose of this study is to investigate empirically the pattern of co-movement between prices and implied volatility in the future markets for crude oil.Design/methodology/approachThe tool of non-parametric quantile regression is applied to daily price returns and implied volatility changes from 2007 to 2018.FindingsFor the total sample period, the link between price returns and forward-looking volatility expectations is contemporaneous, negative and asymmetric, and it exhibits an (approximately) inverted U-shaped pattern suggesting that: the pricing of implied volatility is heavier for large (in absolute value terms) changes relative to small ones and it is lighter for large positive changes relative to large negative ones. The pattern of co-movement, therefore, appears to be in line with the theoretical postulates of fear, exuberance and loss aversion. The main characteristics of the relationship are present in some (but not in all) sub-periods, which are also considered in this study.Originality/valueLess than a handful of works have assessed the link between implied volatility and prices for commodity ETFs. This is the first one relying on flexible non-parametric quantile regressions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Economics and Finance Emerald Publishing

Crude oil price and implied volatility

Fousekis, Panos
Studies in Economics and Finance , Volume 36 (2): 15 – Jun 21, 2019
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References (44)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1086-7376
DOI
10.1108/sef-04-2018-0117
Publisher site
See Article on Publisher Site

Abstract

The purpose of this study is to investigate empirically the pattern of co-movement between prices and implied volatility in the future markets for crude oil.Design/methodology/approachThe tool of non-parametric quantile regression is applied to daily price returns and implied volatility changes from 2007 to 2018.FindingsFor the total sample period, the link between price returns and forward-looking volatility expectations is contemporaneous, negative and asymmetric, and it exhibits an (approximately) inverted U-shaped pattern suggesting that: the pricing of implied volatility is heavier for large (in absolute value terms) changes relative to small ones and it is lighter for large positive changes relative to large negative ones. The pattern of co-movement, therefore, appears to be in line with the theoretical postulates of fear, exuberance and loss aversion. The main characteristics of the relationship are present in some (but not in all) sub-periods, which are also considered in this study.Originality/valueLess than a handful of works have assessed the link between implied volatility and prices for commodity ETFs. This is the first one relying on flexible non-parametric quantile regressions.

Journal

Studies in Economics and Finance – Emerald Publishing

Published: Jun 21, 2019

Keywords: Volatility; Non-parametric quantile regression; Oil prices; G10; C12

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