Dynamic connectedness among the implied volatilities of oil prices and financial assets: New evidence of the COVID-19 pandemic

This paper examines the dynamic connectedness among the implied volatilities of oil prices (OVX) and fourteen other assets, which can be grouped into five different assets classes (i.e., energy commodities, stock markets, precious metals, exchange rates and bond markets). To do so we estimate a recently developed time-varying parameter vector autoregressive (TVP-VAR) connectedness approach using daily data spanning from March 16th, 2011 to March 3rd, 2021 — covering the first year of the COVID-19 pandemic. The empirical results suggest that connectedness across the different asset classes and oil price implied volatilities are varying over time and fluctuate at very high levels. The dynamic total connectedness ranges between 65% and 85% indicating a high degree of cross-market risk linkages. Furthermore, we find that the oil market is becoming more integrated with the financial markets, since it tends to be materially impacted by abrupt fluctuations of the global financial markets’ volatilities. More specifically, the analysis shows that, throughout the period, OVX is a net receiver of shocks to the remaining implied volatilities. Finally, the net pairwise connectedness measures suggest that OVX is constantly at the net receiving end vis-a-vis the majority of the asset classes’ implied volatilities. Those findings are of major importance for portfolio and risk management in terms of asset allocation and diversification.