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An S-Shaped Crude Oil Price Return-Implied Volatility Relation: Parametric and Nonparametric Estimations

Author

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  • Julio Cesar Araujo da Silva Junior

Abstract

Oil market movements have important implications for portfolio management and hedge strategies for investors who negotiate this commodity. Studies involving the relation of the CBO Crude Oil ETF Volatility Index (OVX) and the United States Oil Fund (USO) return are small in number and do not explore some aspects related to the asymmetry and nonlinearity of this relation. Therefore, this article proposes an analysis about the relation between return and volatility, using parametric and nonparametric methods. To do so, a daily data series from 2007 to 2016, ordinary least squares, quantile regressions and the nonparametric B-splines methods were used. The results indicated a negative, asymmetric and nonlinear contemporary relation between the variables. The effects of negative returns were more pronounced than the positive ones in volatility. In addition, it was found that the relation is not the same for different quantiles. Nonparametric estimates suggested that the positive returns have a convex profile and the negative returns have a concave profile. It indicated the downward-sloping reclined S-curve for the 0.05, 0.90 and 0.95 quantiles of volatility.

Suggested Citation

  • Julio Cesar Araujo da Silva Junior, 2017. "An S-Shaped Crude Oil Price Return-Implied Volatility Relation: Parametric and Nonparametric Estimations," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(12), pages 54-70, December.
    • Handle: RePEc:ibn:ijefaa:v:9:y:2017:i:12:p:54-70
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    References listed on IDEAS

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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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