We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
Markov-Regime Switches in Oil Markets: The Fear Factor Dynamics.
- Authors
Okawa, Hiroyuki
- Abstract
This paper is an attempt to examine regime switches in the empirical relation between return dynamics and implied volatility in energy markets. The time-varying properties of the return-generating process are defined as a function of several risk factors, including oil market volatility and changes in stock prices and currency rates. The empirical evidence is based on Markov-regime switching models, which have the capacity to capture, in particular, the stochastic behavior of the OVX oil volatility index as a benchmark for investors' fear. The results suggest that the dynamics of oil market returns are governed by two distinct regimes, a state driven by a negative relationship between returns and implied volatility and another state characterized by a more pronounced negative correlation. It is the latter regime with a stronger correlation that tends to prevail over the sample period from 2008 to 2021, but the frequency of regime shifts also seems to increase under more volatile oil price dynamics in association with significant events such as the COVID-19 pandemic. Thus, the evidence of a negative correlation structure is found to be robust to changes in the estimation period, which suggests that the oil volatility index remains a reliable gauge of market sentiment in the energy markets.
- Subjects
MARKET volatility; ESSENTIAL oils; MARKET sentiment; INVESTORS; PETROLEUM; COVID-19 pandemic; VEGETABLE oils
- Publication
Journal of Risk & Financial Management, 2023, Vol 16, Issue 2, p67
- ISSN
1911-8066
- Publication type
Article
- DOI
10.3390/jrfm16020067