Directional predictability of implied volatility: From crude oil to developed and emerging stock markets

Abstract

This paper investigates whether the implied volatility of crude oil improves the directional predictability of the implied volatility index for some major developed and emerging stock markets. Using cross-quantilograms via Han et al (2016), we find strong and persistent quantile predictability when the crude oil implied volatility is low. The effect remains significant but a bit weaker when the oil implied volatility is high. There is no improvement in directional predictability when the implied volatility of oil is at the medium level. The rolling window analysis indicates the above results are robust when the global financial crisis period is excluded.