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Quantile Dependence between Crude Oil Returns and Implied Volatility: Evidence from Parametric and Nonparametric Tests

Author

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  • Bechir Raggad

    (Department of Business Administration, College of Business Administration in Majmaah, Majmaah University, Majmaah 11952, Saudi Arabia
    Faculty of Economics and Management in Nabeul, University of Carthage, Carthage 2085, Tunisia
    BESTMOD Laboratory, Higher Institute of Management of Tunis, University of Tunis, Tunis 1002, Tunisia)

  • Elie Bouri

    (School of Business, Lebanese American University, Beirut P.O. Box 13-5053, Lebanon)

Abstract

We examine the daily dependence and directional predictability between the returns of crude oil and the Crude Oil Volatility Index (OVX). Unlike previous studies, we apply a battery of quantile-based techniques, namely the quantile unit root test, the causality-in-quantiles test, and the cross-quantilogram approach. Our main results show evidence of significant bi-directional predictability that is quantile-dependent and asymmetric. A significant positive Granger causality runs from oil (OVX) returns to OVX (oil) returns when both series are in similar lower (upper) quantiles, as well as in opposite quantiles. The Granger causality from OVX returns to oil returns is only significant during periods of high volatility, although it is not always positive. The findings imply that the forward-looking estimate of oil volatility, reflecting the sentiment of oil market participants, should be considered when studying price variations in the oil market, and that crude oil returns can be used to predict oil implied volatility during bearish market conditions. Therefore, the findings have implications regarding predictability under various conditions for oil market participants.

Suggested Citation

  • Bechir Raggad & Elie Bouri, 2023. "Quantile Dependence between Crude Oil Returns and Implied Volatility: Evidence from Parametric and Nonparametric Tests," Mathematics, MDPI, vol. 11(3), pages 1-23, January.
    • Handle: RePEc:gam:jmathe:v:11:y:2023:i:3:p:528-:d:1040353
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