Nonlinear Relationships between Oil Prices and Implied Volatilities: Providing More Valuable Information

Jeng-Bau Lin, Chin-Chia Liang and Wei Tsai
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Jeng-Bau Lin: Department of Business Administration, National Chung-Hsing University, Taichung 402, Taiwan
Chin-Chia Liang: Department of Finance, Da-Yeh University, Changhua 51591, Taiwan
Wei Tsai: Department of Business Administration, National Chung-Hsing University, Taichung 402, Taiwan

Sustainability, 2019, vol. 11, issue 14, 1-15

Abstract: This paper investigates the linear/nonlinear long-run and short-run dynamic relationships between oil prices and two implied volatilities, oil price volatility index (OVX) and stock index options volatility index (VIX), representing panic gauges. The results show that there is a long-run equilibrium relationship between oil prices and OVX (VIX) using the linear autoregressive distributed lag (ARDL)-bounds test. Likewise, while using the nonlinear autoregressive distributed lag (NARDL)-bounds test, not only does a long-run equilibrium relationship exist, but also the rising OVX (VIX) has a greater negative influence on oil prices than the declining OVX (VIX), thus indicating that a long-run, asymmetric cointegration exists between the variables. Furthermore, OVX (VIX) oil prices have a linear Granger causality, while for the nonlinear Granger causality test, oil prices have a bidirectional relation with OVX (VIX). In addition, we find that once major international political and economic events occur, structural changes in oil prices change the behavior of oil prices, and thus panic indices, thereby switching from a linear relationship to a nonlinear one. The empirical results of this study provide market participants with more valuable information.

Keywords: short-term speculative spread; fear gauge; global political and economic events; multiple structural changes; linear granger causality test; nonlinear granger causality test (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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