Oil Price, Oil Price Implied Volatility (OVX) and Illiquidity Premiums in the US: (A)symmetry and the Impact of Macroeconomic Factors

Mohammad Sharik Essa,Evangelos Giouvris

doi:10.3390/jrfm13040070

Mohammad Sharik Essa, Evangelos Giouvris

Open Access

https://doi.org/10.3390/jrfm13040070

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Abstract

We examine the impact of oil price and oil price volatility on US illiquidity premiums (return on illiquid-minus-liquid stocks), using the US Oil Fund options implied volatility OVX index. We use daily data from 2007 to 2018, taking into account the structural break in June 2009 and controlling for macroeconomic factors. Both OLS and VAR models indicate that oil price has a significantly positive impact and OVX has a significantly negative impact on premiums, for the full sample and post-crisis period. These relationships are potentially driven by investor sentiments and market liquidity. Oil price has a negative impact on premiums during the crisis period. Using an autoregressive distribution lag model and an error correction model, we analyse long- and short-run elasticities. We find that oil price has a significantly positive impact on premiums both in the long- and short-run, for the full sample and post-crisis period. OVX only has a significantly negative impact in the short-run for the full sample. The reverting mechanism to establish long-run equilibrium is effective for the full sample and post-crisis period. Illiquidity premiums do not show any asymmetric responses to oil price changes but we do find evidence of asymmetric response to OVX changes.

Highlights

Oil as a resource has a significant role in the world economy, there has been large amounts of research done to capture the impact of oil price on economic and financial activity
Oil prices rose from $96 in December 2007 and peaked at $147.30 in July 2008. This was followed by a steep decline, reaching a low of $32 in December 2008. To capture this structural shift and its impact on illiquidity premiums, we split our sample into two sub-samples; December 2007 to June 2009 which is classified as the financial crisis period, and July 2009 to December 2018 which is classified as the post-crisis period
The results show that illiquidity premiums have a positive and statistically significant relationship with oil prices while they have a negative and statistically significant relationship with implied oil volatility

Summary

Introduction

Oil as a resource has a significant role in the world economy, there has been large amounts of research done to capture the impact of oil price on economic and financial activity. This paper looks to extend on the study of the relationship between oil prices and financial markets by looking at potential influences on illiquidity premiums within the NYSE. An ever-expanding asset universe available to investors, greater funding access (Rajan 2006) and the general uptick within availability of information, have all resulted in a rise in the prominence of illiquidity within research and of illiquidity as an investment style. In addition to these factors, more focus has been put on illiquidity and liquidity risk as it was a major source for the financial crisis (Brunnermeier 2009; Crotty 2009). This would imply that liquidity has far reaching consequences in terms of its impact on the whole financial system

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