Quantile Dependence between Crude Oil Returns and Implied Volatility: Evidence from Parametric and Nonparametric Tests

Bechir Raggad () and Elie Bouri
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Bechir Raggad: Department of Business Administration, College of Business Administration in Majmaah, Majmaah University, Majmaah 11952, Saudi Arabia
Elie Bouri: School of Business, Lebanese American University, Beirut P.O. Box 13-5053, Lebanon

Mathematics, 2023, vol. 11, issue 3, 1-23

Abstract: We examine the daily dependence and directional predictability between the returns of crude oil and the Crude Oil Volatility Index (OVX). Unlike previous studies, we apply a battery of quantile-based techniques, namely the quantile unit root test, the causality-in-quantiles test, and the cross-quantilogram approach. Our main results show evidence of significant bi-directional predictability that is quantile-dependent and asymmetric. A significant positive Granger causality runs from oil (OVX) returns to OVX (oil) returns when both series are in similar lower (upper) quantiles, as well as in opposite quantiles. The Granger causality from OVX returns to oil returns is only significant during periods of high volatility, although it is not always positive. The findings imply that the forward-looking estimate of oil volatility, reflecting the sentiment of oil market participants, should be considered when studying price variations in the oil market, and that crude oil returns can be used to predict oil implied volatility during bearish market conditions. Therefore, the findings have implications regarding predictability under various conditions for oil market participants.

Keywords: quantile dependence; directional predictability; granger causality in quantiles; crude oil returns; oil implied volatility (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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