Can implied volatility predict returns on oil market? Evidence from Cross-Quantilogram Approach

Raggad, Bechir

doi:10.1016/j.resourpol.2022.103277

Cited by 8 publications

(1 citation statement)

References 34 publications

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“…More recently, Raggad [58] applies the Cross-Quantilogram approach to explore whether the OVX can reliably predict WTI returns, and finds that the information content of OVX plays a role in forecasting WTI returns once it is in the higher conditional quantile, but no evidence of predictability is uncovered once the OVX is at the low to medium quantile levels.…”

Section: Literature Reviewmentioning

confidence: 99%

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

Raggad

Bouri

2023

Mathematics

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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.

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Section: Literature Reviewmentioning

confidence: 99%