The Relation between Implied Volatility Index and Crude Oil Prices

Authors

  • Imlak Shaikh Management Development Institute Gurgaon, India

DOI:

https://doi.org/10.5755/j01.ee.30.5.21611

Keywords:

Crude-oil, CBOE, implied volatility, OVX, WTI, USO-ETF

Abstract

Crude oil is a global commodity traded across the world market. The prices of the commodity over an extended period for crude oil have been analyzed using daily prices of crude oil futures and the implied volatility index (OVX). This paper aims to find the predictability of various parameters on the basis of time using neural network and quantile regression methods. Several estimates have been shown based on Barone, Adesi, and Whaley’s (BAW) model of neural network. Estimation parameters include opening, closing, highest and lowest price of the commodity and volumes traded for a given commodity on each trading day. The neural network estimates explain that future prices of the WTI/USO can be predicted with minimal error, and similar can be used to predict future volatility. The quantile regression results suggest that crude oil prices and OVX are strongly associated. The asymmetric association between the WTI/USO and OVX explains that the volatility feedback effect holds good for the OVX market. Bai and Perron least squares estimate evidence of the presence of a break in the time series. The main results uncover several interesting facts that implied volatility tends to remain calm during the global financial crises and higher throughout the post crisis period. The empirical outcome on the OVX market provides some practical implications for the trader and investor, in which oil futures can serve better to hedge the crude price volatility. The crude oil producer can short hedge enough through volatility futures and options to maintain the future quantity of crude to be produced.

Author Biography

Imlak Shaikh, Management Development Institute Gurgaon, India

An assistant professor of accounting and finance at MDI Gurgaon. Previously, he served as an assistant professor at the Birla Institute of Technology & Science, BITS Pilani. Shaikh has also taught at IIM Rohtak as an adjunct faculty in FPM program. He received his post graduation degree in commerce from the Veer Narmad South Gujarat University Surat; his Ph.D from Indian Institute of Technology Bombay (IIT-Bombay). He has been awarded with ‘Ph.D Theses Excellence Award’ from IIT-Bombay. He has published several papers in national and international journals of repute. His area of teaching and research: Teaching Interest: Financial Management; Financial and Management Accounting; Risk Management and Insurance; Research Interest: Banking and Finance; Financial markets; Accounting and Control; Management Accounting.

Additional Files

Published

2019-12-14

Issue

Section

ECONOMICS OF ENGINEERING DECISIONS