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Tail Dependence between Crude Oil Volatility Index and WTI Oil Price Movements during the COVID-19 Pandemic

Krzysztof Echaust () and Małgorzata Just ()
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Krzysztof Echaust: Department of Operations Research and Mathematical Economics, Poznań University of Economics and Business, Al. Niepodległości 10, 61-875 Poznań, Poland
Małgorzata Just: Department of Finance and Accounting, Poznań University of Life Sciences, Wojska Polskiego 28, 60-637 Poznań, Poland

Energies, 2021, vol. 14, issue 14, 1-21

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.

Keywords: OVX; crude oil; implied volatility; tail dependence; Value at Risk; GARCH-EVT (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2021
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