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Impacts of oil implied volatility shocks on stock implied volatility in China: Empirical evidence from a quantile regression approach

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  • Xiao, Jihong
  • Hu, Chunyan
  • Ouyang, Guangda
  • Wen, Fenghua

Abstract

This paper investigates the impacts of changes in the implied volatility index of the oil market (OVX) on the changes in the implied volatility index of the Chinese stock market (VXFXI). A quantile regression approach is applied to our empirical analysis, as this approach can perform a more detailed investigation under different market conditions. Moreover, we test whether the VXFXI changes would respond with lags and asymmetry to the OVX changes. Our empirical results show that the impacts of the OVX changes on the VXFXI changes are positive and tend to be stronger in bearish markets. Furthermore, the results of testing lagged effects reveal that strong linkages between the two variables are transient in different market conditions, which don't support the gradual information diffusion hypothesis very well. Finally, we find that the OVX changes can asymmetrically affect the VXFXI changes. Specifically, the negative OVX changes have stronger effects under bullish market conditions, while the positive OVX changes play a more important role during bearish periods.

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  • Xiao, Jihong & Hu, Chunyan & Ouyang, Guangda & Wen, Fenghua, 2019. "Impacts of oil implied volatility shocks on stock implied volatility in China: Empirical evidence from a quantile regression approach," Energy Economics, Elsevier, vol. 80(C), pages 297-309.
  • Handle: RePEc:eee:eneeco:v:80:y:2019:i:c:p:297-309
    DOI: 10.1016/j.eneco.2019.01.016
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    Keywords

    Implied volatility indices; Oil market; Chinese stock market; Quantile regression; Gradual information diffusion hypothesis;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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