Oil And Asset Classes Implied Volatilities: Dynamic Connectedness And Investment Strategies

40 Pages Posted: 17 Jun 2019

See all articles by Nikolaos Antonakakis

Nikolaos Antonakakis

Webster University - Webster Vienna Private University

Juncal Cuñado

University of Navarra

George Filis

Bournemouth University

David Gabauer

Johannes Kepler University; Webster University - Webster Vienna Private University

Fernando Perez de Gracia

University of Navarra

Date Written: June 6, 2019

Abstract

Building on the increased interest in the spillover effects among oil prices and other financial assets, this paper examines dynamic connectedness and contagion effects of their implied volatility shocks. We then proceed to the examination of the optimal hedging strategies and optimal portfolio weights for implied volatility portfolios between oil and financial assets. The results suggest that oil implied volatility (OVX) is a net volatility receiver of shocks, whereas implied volatilities indices by the stock markets (mature or emerging) are net volatility transmitters. Hedge ratios indicate that VIX is the least useful implied volatility index to hedge against oil implied volatility. Finally, we show that investors can benefit substantially by adjusting their portfolios based on the dynamic weights and hedge ratios obtained from the dynamic conditional correlation models, although a trade-off exists between the level of risk reduction and portfolio profitability.

Keywords: Dynamic connectedness; hedging strategies; volatility portfolios; oil prices; stock market indices

JEL Classification: C32, F3, G12, Q43.

Suggested Citation

Antonakakis, Nikolaos and Cuñado, Juncal and Filis, George and Gabauer, David and de Gracia, Fernando Perez, Oil And Asset Classes Implied Volatilities: Dynamic Connectedness And Investment Strategies (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3399996 or http://dx.doi.org/10.2139/ssrn.3399996

Nikolaos Antonakakis

Webster University - Webster Vienna Private University ( email )

Praterstrasse 23
Vienna, 1020
Austria

Juncal Cuñado

University of Navarra

Camino del Cerro del Aguila, 3
Pamplona, Navarra 31080
Spain

George Filis (Contact Author)

Bournemouth University ( email )

Fern Barrow
Poole BH12 5BB, Dorset BH8 8EB
United Kingdom

David Gabauer

Johannes Kepler University ( email )

Altenbergerstraße 69
Linz, 4040
Austria

Webster University - Webster Vienna Private University ( email )

Praterstraße 23
Vienna, Vienna 1020
Austria

Fernando Perez De Gracia

University of Navarra

Camino del Cerro del Aguila, 3
Pamplona, Navarra 31080
Spain

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