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How does oil market uncertainty interact with other markets? An empirical analysis of implied volatility index

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  • Liu, Ming-Lei
  • Ji, Qiang
  • Fan, Ying

Abstract

OVX (Crude oil volatility index), as a measure of oil market uncertainty and new volatility derivatives published by CBOE (Chicago Board Options Exchange) during the 2008 global financial crisis, provides a direct prediction of the market's expectation for future 30-day crude oil price volatility. This paper investigates the short- and long-term cross-market uncertainty transmission implied by OVX and other important volatility indices which are VIX (stock market volatility index), EVZ (euro/dollar exchange rate volatility index) and GVZ (gold price volatility index). The results indicate that there are no strong long-run equilibrium relationships among these volatility indices, which indirectly verify the effectiveness of cross-market volatility portfolio strategy for risk hedge. Furthermore, OVX is significantly influenced by other ones, which indicates that investors' volatility expectation in the oil market become more sensitive to uncertainty shocks from other markets when the global economic situation is extremely unstable. Finally, impacts of interior and exterior uncertainty shocks on OVX are found to be positive and transient. And the significant short-term uncertainty transmission between oil and other major markets has been confirmed.

Suggested Citation

  • Liu, Ming-Lei & Ji, Qiang & Fan, Ying, 2013. "How does oil market uncertainty interact with other markets? An empirical analysis of implied volatility index," Energy, Elsevier, vol. 55(C), pages 860-868.
  • Handle: RePEc:eee:energy:v:55:y:2013:i:c:p:860-868
    DOI: 10.1016/j.energy.2013.04.037
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