Dynamic Relationship between Volatility Risk Premia of Stock and Oil Returns

Nobuhiro Nakamura, Kazuhiko Ohashi () and Daisuke Yokouchi
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Nobuhiro Nakamura: Graduate School of Business Administration, Hitotsubashi University, 2-1-2 Hitotsubashi, Chiyoda-ku, Tokyo 101-8439, Japan
Kazuhiko Ohashi: Graduate School of Business Administration, Hitotsubashi University, 2-1-2 Hitotsubashi, Chiyoda-ku, Tokyo 101-8439, Japan
Daisuke Yokouchi: Graduate School of Business Administration, Hitotsubashi University, 2-1-2 Hitotsubashi, Chiyoda-ku, Tokyo 101-8439, Japan

JRFM, 2023, vol. 16, issue 3, 1-20

Abstract: This study investigates the relationship between the volatility risk premia (VRP) of stock and oil returns. Using daily data on VRP from 10 May 2007 to 16 May 2017, VAR analyses on the stock and oil VRP are conducted, and it is found that the effects of the stock VRP on the oil VRP are limited and, if any, short-lived. In contrast, the VRP of oil has significantly positive and long-lasting effects on the stock VRP after the financial crisis. These results suggest that investors’ sentiments (measured by VRP) are transmitted from the oil to the stock market over time, but not vice versa. This is unexpected because the financialization of commodities means a massive increase in investment in commodities by investors in the traditional stock and bond markets; hence, the direction of effects is thought to be from the stock to the commodity market.

Keywords: volatility risk premium (VRP); implied and realized volatility; oil and stock returns; financialization (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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