Crude oil price and implied volatility

Panos Fousekis (Department of Economics, Aristotle University of Thessaloniki, Thessaloniki, Greece)

Studies in Economics and Finance

ISSN: 1086-7376

Publication date: 24 June 2019

Abstract

Purpose

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.

Design/methodology/approach

The tool of non-parametric quantile regression is applied to daily price returns and implied volatility changes from 2007 to 2018.

Findings

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.

Originality/value

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.

Keywords

Citation

Fousekis, P. (2019), "Crude oil price and implied volatility", Studies in Economics and Finance, Vol. 36 No. 2, pp. 168-182. https://doi.org/10.1108/SEF-04-2018-0117

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Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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