Abstract
This study investigates the dependence between extreme returns of West Texas Intermediate (WTI) crude oil prices and the Crude Oil Volatility Index (OVX) changes as well as the predictive power of OVX to generate accurate Value at Risk (VaR) forecasts for crude oil. We focus on the COVID-19 pandemic period as the most violate in the history of the oil market. The static and dynamic conditional copula methodology is used to measure the tail dependence coefficient (TDC) between the variables. We found a strong relationship in the tail dependence between negative returns on crude oil and OVX changes and the tail independence for positive returns. The time-varying copula discloses the strongest tail dependence of negative oil price shocks and the index changes during the COVID-19 health crisis. The findings indicate the ability of the OVX index to be a fear gauge with respect to the oil market. However, we cannot confirm the ability of OVX to improve one day-ahead forecasts of the Value at Risk. The impact of investors’ expectations embedded in OVX on VaR forecasts seems to be negligible.
Highlights
We contribute to the existing literature in two ways: (1) we found stronger strength and asymmetry in the tail dependence between Oil Volatility Index (OVX) changes and negative crude oil returns compering to positive returns during the COVID-19 pandemic
Salisu and Fasanya [62] studied asymmetry in oil price shocks and oil price volatility measured with the Exponential GARCH (EGRCH) model
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Summary
Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. Bongiovanni et al [46] showed a poor performance of VIX in VaR measurement of the portfolio replicating the S&P500 index during the most turbulent market phase, causing the inadequacy of this model both for the failure rate and the size of losses Their performance is significantly better when the market faces more normal conditions, where the lower volatility allows them to reduce the corresponding failure rate and the average losses that occur. Comparing to other studies we analyze the dependence between extreme values of OVX changes and WTI returns and we focus on the situations where the informative role of the fear index is the most important; (2) In the Arab Spring and COVID-19 health crisis, the expectation factor (OVX) affects oil price volatility.
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