Abstract
This paper investigates the linear/nonlinear long-run and short-run dynamic relationships between oil prices and two implied volatilities, oil price volatility index (OVX) and stock index options volatility index (VIX), representing panic gauges. The results show that there is a long-run equilibrium relationship between oil prices and OVX (VIX) using the linear autoregressive distributed lag (ARDL)-bounds test. Likewise, while using the nonlinear autoregressive distributed lag (NARDL)-bounds test, not only does a long-run equilibrium relationship exist, but also the rising OVX (VIX) has a greater negative influence on oil prices than the declining OVX (VIX), thus indicating that a long-run, asymmetric cointegration exists between the variables. Furthermore, OVX (VIX) oil prices have a linear Granger causality, while for the nonlinear Granger causality test, oil prices have a bidirectional relation with OVX (VIX). In addition, we find that once major international political and economic events occur, structural changes in oil prices change the behavior of oil prices, and thus panic indices, thereby switching from a linear relationship to a nonlinear one. The empirical results of this study provide market participants with more valuable information.
Highlights
Dramatic fluctuations in oil prices have had a major impact on various commodity markets, especially the severe financial crisis in mid-September 2008 that led to structural changes in the crude oil market [1,2] making the system of the entire market more vulnerable
The statement at the website [3] claims that the Chicago Board Options Exchange (CBOE) Crude Oil ETF Volatility Index (OVX) measures the market’s expectation of 30-day volatility of crude oil prices by applying the stock index options volatility index (VIX) methodology to United States Oil Fund, LP (USO) options spanning a wide range of strike prices
oil price volatility index (OVX), and VIX are on diffffeerreenntt iinntteeggrrated orders, we used linear autoregressive distributed lag (ARDL) to study thhee imppaacctt ooff OVXX and VIX on the oil price
Summary
Dramatic fluctuations in oil prices have had a major impact on various commodity markets, especially the severe financial crisis in mid-September 2008 that led to structural changes in the crude oil market [1,2] making the system of the entire market more vulnerable. [5] pointed out that OVX is a measure of uncertainty in the oil market and can directly predict market expectations for future 30-day crude oil price volatility. In the literature on oil prices and related volatilities, authors in [7] indicated that oil price volatility positively influences stock returns, but the impact of implied volatility index of crude oil (OVX) is negative, which means the rise in future oil price uncertainty has caused the stock prices to fall. Using the implied volatility index (VIX) provided by Chicago Board Options Exchange (CBOE) to study the relationship between oil price and the US energy stock returns, authors in [8] showed that a long-run relationship exists between the oil and VIX. Authors in [11] documented that there is a significant, negative relationship between OVX changes and West Texas Intermediate (WTI) returns, and that the asymmetry relationship between them means the OVX has a greater predictive effect of gauging an investor’s fear rather than risk preference
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