Implied volatility relationships between crude oil and the U.S. stock markets: Dynamic correlation and spillover effects

Abstract

This paper investigates the dynamic correlation and risk transmission between the oil market and the U.S. stock market, using the respective implied volatility indices published by the Chicago Board Options Exchange. The results indicate that, first, there is a significant positive time-varying correlation between oil and stock implied volatility returns. Second, during the global financial crisis, the correlation between oil and stock markets increases significantly. Third, there is a significant bidirectional implied volatility spillover between the oil and stock markets. Insights gleaned from the findings in this study could project energy and monetary policy implications. Monetary and/or energy policy changes could impact the predicted linkage mechanism between these two markets, which can be further leveraged to forecast the market's future volatility.