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Modelling the joint dynamics of oil prices and investor fear gauge

Author

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  • Ji, Qiang
  • Fan, Ying

Abstract

This paper investigates the interdependent relationship between WTI returns and the newly published crude oil volatility index (OVX), combining a cross-correlation function approach, a time-varying parameter (TVP) GARCH model, and a multivariate regression analysis, by which the direction, dynamics, magnitude and asymmetry of their relationship are modelled. At the same time, the implied volatility indexes in the stock market and the gold market are considered for comparison. It is found that there is a significant unidirectional causality-in-mean from WTI returns to the OVX changes, while causality-in-variance from the OVX changes to WTI returns is also significant. The contemporaneous relationship between the OVX changes and WTI returns is significantly negative, and their asymmetric relationship implies that OVX has played a greater role as a gauge of investor fear than as risk preference. The time-varying results indicate that the relationship between the changes in OVX and WTI returns is not always negative.

Suggested Citation

  • Ji, Qiang & Fan, Ying, 2016. "Modelling the joint dynamics of oil prices and investor fear gauge," Research in International Business and Finance, Elsevier, vol. 37(C), pages 242-251.
  • Handle: RePEc:eee:riibaf:v:37:y:2016:i:c:p:242-251
    DOI: 10.1016/j.ribaf.2015.11.016
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    References listed on IDEAS

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    1. repec:eee:eneeco:v:68:y:2017:i:c:p:53-65 is not listed on IDEAS
    2. repec:eee:finana:v:57:y:2018:i:c:p:1-12 is not listed on IDEAS
    3. repec:eee:eneeco:v:69:y:2018:i:c:p:42-58 is not listed on IDEAS

    More about this item

    Keywords

    OVX; Implied volatility index; Fear gauge; Time-varying relationship; TVP GARCH model;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • F39 - International Economics - - International Finance - - - Other
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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