The purpose of this study is to investigate empirically the pattern of co-movement between prices and implied volatility in the future markets for crude oil.
The tool of non-parametric quantile regression is applied to daily price returns and implied volatility changes from 2007 to 2018.
For the total sample period, the link between price returns and forward-looking volatility expectations is contemporaneous, negative and asymmetric, and it exhibits an (approximately) inverted U-shaped pattern suggesting that: the pricing of implied volatility is heavier for large (in absolute value terms) changes relative to small ones and it is lighter for large positive changes relative to large negative ones. The pattern of co-movement, therefore, appears to be in line with the theoretical postulates of fear, exuberance and loss aversion. The main characteristics of the relationship are present in some (but not in all) sub-periods, which are also considered in this study.
Less than a handful of works have assessed the link between implied volatility and prices for commodity ETFs. This is the first one relying on flexible non-parametric quantile regressions.
The authors would like to thank the two anonymous referees and the Editor (N. Wagner) for their valuable suggestions and comments. The usual disclaimers apply.
Fousekis, P. (2019), "Crude oil price and implied volatility: Insights from non-parametric quantile regressions", Studies in Economics and Finance, Vol. 36 No. 2, pp. 168-182. https://doi.org/10.1108/SEF-04-2018-0117Download as .RIS
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