Energy Economics 80 (2019) 297–309

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Energy Economics

journal homepage: www.elsevier.com/locate/eneeco

Impacts of oil implied volatility shocks on stock implied volatility in

China: Empirical evidence from a quantile regression approach
Jihong Xiao a, Chunyan Hu b, Guangda Ouyang c, Fenghua Wen a,d,e,⁎
a
School of Business, Central South University, Changsha 410083, China
b
School of public administration, Central South University, Changsha 410083, China
c
Washington University, One Brookings Drive, St. Louis, MO 63130, United States
d
Supply Chain and Logistics Optimization Research Centre, Faculty of Engineering, University of Windsor, Windsor, ON, Canada
e
Centre for Computational Finance and Economic Agents, University of Essex, Colchester CO4 3SQ, UK

a r t i c l e i n f o a b s t r a c t

Article history: This paper investigates the impacts of changes in the implied volatility index of the oil market (OVX) on the
Received 29 September 2018 changes in the implied volatility index of the Chinese stock market (VXFXI). A quantile regression approach is
Received in revised form 7 January 2019 applied to our empirical analysis, as this approach can perform a more detailed investigation under different mar-
Accepted 18 January 2019
ket conditions. Moreover, we test whether the VXFXI changes would respond with lags and asymmetry to the
Available online 24 January 2019
OVX changes. Our empirical results show that the impacts of the OVX changes on the VXFXI changes are positive
JEL classifications:
and tend to be stronger in bearish markets. Furthermore, the results of testing lagged effects reveal that strong
C21 linkages between the two variables are transient in different market conditions, which don't support the gradual
E44 information diffusion hypothesis very well. Finally, we find that the OVX changes can asymmetrically affect the
G12 VXFXI changes. Specifically, the negative OVX changes have stronger effects under bullish market conditions,
G15 while the positive OVX changes play a more important role during bearish periods.
G41 © 2019 Elsevier B.V. All rights reserved.
Q43

Keywords:
Implied volatility indices
Oil market
Chinese stock market
Quantile regression
Gradual information diffusion hypothesis

1. Introduction
Crude oil, as one of the most important commodities, has crucial
influence on the development of economy and financial market (Zhu
et al., 2014; Wen et al., 2016). Since the seminal work of Hamilton
(1983), a large number of studies have been attracted to investigate
the relationships between oil prices and economic and financial
variables such as economic growth, inflation rate and exchange rate
(Chen, 2009; Jo, 2014; Cunado et al., 2015; Wen et al., 2018a). Oil prices
are also regarded to play an important role in affecting the stock market
via many transmission channels. In general, oil prices can show effects
on the stock market directly by influencing future cash flows or indi-
rectly through the interest rate used to discount the future cash flows
(Basher et al., 2012; Salisu and Isah, 2017). Additionally, the fluctuations
in oil market may transmit to stock market by affecting investors'
⁎ Corresponding author at: School of Business, Central South University, Changsha
410083, China.
E-mail address: wfh@amss.ac.cn (F. Wen).
expectation, as oil market can reflect the state of the global economy
(Chen and Lv, 2015; You et al., 2017).
Until recently, numerous studies have explored the relationships be-
tween oil and stock markets (Jones and Kaul, 1996; Sadorsky, 1999;
Basher and Sadorsky, 2006; Driesprong et al., 2008; Kilian and Park,
2009; Lee and Zeng, 2011; Narayan and Sharma, 2011; Basher et al.,
2012; Ghosh and Kanjilal, 2016; Salisu and Isah, 2017, among others).
However, relatively few studies investigate the relationships between
oil market volatility and stock market volatility (e.g., Malik and
Hammoudeh, 2007; Malik and Ewing, 2009; Arouri et al., 2011; Bouri,
2015a; Bouri and Demirer, 2016; Dutta et al., 2017). In fact, due to the
heavy shocks of the 2008 financial crisis, the whole market system be-
comes more fragile and the contagion effects among markets have
been enhanced (Liu et al., 2013). At the same time, the uncertainty in
oil market has been increasing in recent years because of the impacts
of many important factors, such as complex economic circumstances,
financial crises, geopolitical tensions, renewable energy policies and
the financialization of oil market. Under this condition, oil market un-
certainty is more likely to transmit to stock market and thus increase

https://doi.org/10.1016/j.eneco.2019.01.016
0140-9883/© 2019 Elsevier B.V. All rights reserved.
298 J. Xiao et al. / Energy Economics 80 (2019) 297–309
its risk. Given that volatility is a popular proxy for market uncertainty or
risk and is closely related to portfolio optimization and option pricing
(Cong et al., 2008; Gong and Lin, 2017; Dai and Wen, 2018; Gong and
Lin, 2018), it is very meaningful to investigate the volatility relation-
ships between oil and stock markets.
In parallel, although there are some studies on the oil-stock volatility
relationships, these studies often use GARCH models or realized volatil-
ities, which only include the history information of market. At present,
the Chicago Board Options Exchange (CBOE) has published a series of
implied volatility indices including the stock markets, the oil market
and other markets. These implied volatility indices, derived from the op-
tion prices, not only include the history information of market, but also
contain the expectation of investors on the future changes in the
market, thus are regarded as a better measure of market uncertainty
(Liu et al., 2013). Additionally, the implied volatility indices can track in-
vestors' sentiment, because when fear is high, a risk premium follows
and options are priced with higher volatilities than the volatilities
used when fear is low (Maghyereh et al., 2016). In brief, the implied
volatility indices can reveal more information than the volatilities calcu-
lated by the price series. Recently, there has been a growing literature
on the volatility relationships between oil and stock markets by
adopting the implied volatility indices (such as Liu et al., 2013;
Maghyereh et al., 2016; Bouri et al., 2017b; Bašta and Molnár, 2018;
Dutta, 2018).
In this paper, we aim to investigate the impacts of oil volatility
shocks on the stock volatility in China by using the implied volatility in-
dices. It is worth noting that this study could not be possible without the
newly published Chinese stock implied volatility index (VXFXI).1 The
case of China is selected due to several important reasons. First, China
has been the second largest oil consumer and the largest net oil im-
porter in the world (Energy Information Administration, 2014), thus
China is of great importance to the international oil market. Second,
since the reform and opening-up in 1978, China has made remarkable
achievements in the economic development and become the largest
emerging economy in the world (Wen et al., 2018c). At the same time,
the stock market in China also grows rapidly in size and volume of in-
vestment, which attracts lots of local and global investors. Finally, inves-
tigating the relationships between the oil market and the Chinese stock
market has been increasingly popular (Cong et al., 2008; Driesprong
et al., 2008; Broadstock et al., 2012; Chen and Lv, 2015; Zhu et al.,
2016; Luo and Qin, 2017; You et al., 2017; Xiao et al., 2018, among
others). However, most of these studies focus on the response of stock
returns to the oil market shocks, there is lack of knowledge about the
volatility relationships between the two markets (Bouri et al., 2017a;
Peng et al., 2018). More importantly, other than Ji et al. (2018), little
work has been devoted to the linkages between the oil implied volatility
and the Chinese stock implied volatility.
We select the quantile regression approach proposed by Koenker
and Bassett (1978) as our main empirical tool. There are two important
motivations for using this approach. The first motivation is that existing
studies ignore the likelihood that the impacts of oil implied volatility
shocks on the stock implied volatility might vary under different market
conditions (such as bearish, normal and bullish markets). In fact, when
stock market is bearish, investors expect higher market volatility and
become frightened. As a result, they may be easier to sell stocks out of
panic in the face with the volatility shocks from other markets, thereby
leading to greater market volatility in the bearish market than in other
market conditions. By analyzing the response of the entire conditional
distribution of the dependent variable to the independent variables,
the quantile regression approach can fully show the detailed informa-
tion about the structure and degree of dependence between dependent
1
The VXFXI is published by the CBOE in 2011, which is one of the newest implied vol-
atility indices. Recently, a few studies have used this index to investigate the volatility re-
lationships among the stock markets (Bouri et al., 2017c; Lucey, 2018) or the volatility
relationships between oil and stock markets (Ji et al., 2018).
and independent variables under normal and extreme markets (Baur,
2013). Recently, this approach has been widely applied to investigate
the relationships between economic and financial variables under dif-
ferent market conditions (Mensi et al., 2014; Bekiros et al., 2017;
Lucey, 2018, among others). Also, some studies have used this approach
to investigate the impacts of oil market shocks on the stock returns in
specific market circumstances and find their heterogeneity relation-
ships (such as Lee and Zeng, 2011; Zhu et al., 2016; You et al., 2017;
Xiao et al., 2018). Thus, we use the quantile regression approach to
access whether stock implied volatility react differently to oil implied
volatility shocks under different market conditions. The second motiva-
tion is that the quantile regression approach can provide more accurate
estimates than OLS regression when the error term doesn't follow the
normal distribution, as this approach is less susceptible to outliers,
heteroskedasticity, and skewness (Koenker and Hallock, 2001; Zhu
et al., 2016). In reality, the implied volatility index changes of stock
market often have the characteristics of sharp peak and fat tail, thus it
is appropriate to use the quantile regression approach.
Under the framework of quantile regression, we further test
whether the impacts of oil implied volatility on the stock implied vola-
tility in China have lags and asymmetry. The lagged impacts of oil im-
plied volatility are tested due to the following reason. Many studies on
the oil-stock relationships often ignore the lagged effects of oil market
shocks (such as El-Sharif et al., 2005; Basher and Sadorsky, 2006; Lee
and Zeng, 2011; Broadstock et al., 2012; Zhu et al., 2016; You et al.,
2017; Xiao et al., 2018). However, some studies, motivated by the grad-
ual information diffusion hypothesis proposed by Hong and Stein
(1999) and Hong et al. (2007), argue that oil market shocks should af-
fect stock market with lags (e.g., Driesprong et al., 2008; Narayan and
Sharma, 2011; Fan and Jahan-Parvar, 2012; Phan et al., 2015). Their ex-
planation for this issue is that investors in the stock market find it diffi-
cult to evaluate the information from the oil market that they don't
specialized in or the response of investors to information in the oil mar-
ket appear at different points in time. Hence, investors in the stock mar-
ket underreact to new information in the oil market. However, this
hypothesis is mainly confirmed in the return relationships between oil
and stock markets. In fact, it is reported that the information transmis-
sion are faster via market implied volatility than market returns (Peng
and Ng, 2012). Unfortunately, no paper clearly tests the gradual infor-
mation diffusion hypothesis when investigating the relationships be-
tween the oil implied volatility and the stock implied volatility.
Testing the asymmetric impacts of oil implied volatility on the stock
implied volatility is also interesting because it can help us to assess
whether the positive shocks of oil implied volatility influence stock im-
plied volatility more than the negative shocks. In fact, using return se-
ries, some papers have provided evidence that the positive and
negative shocks in the oil market have different effects on the stock
market (such as Alsalman and Herrera, 2015; Salisu and Isah, 2017;
You et al., 2017; Hu et al., 2018). In particular, Dutta (2017) and Xiao
et al. (2018) find that there exist asymmetric impacts of oil implied
volatility on the realized volatility of stock returns and stock returns, re-
spectively. In general, the asymmetry existing in the oil-stock relation-
ships may attribute to future cash flows and investors' expectation
having different responses to the positive and negative shocks of oil
market (Salisu and Isah, 2017; Xiao et al., 2018). However, there is little
information about the asymmetric linkages between the oil implied vol-
atility and the stock implied volatility except for Bouri et al. (2017b).
Meanwhile, Bouri et al. (2017b) don't consider extreme market condi-
tions. Hence, we would take into account the asymmetric behaviors of
oil implied volatility when studying the relationships between the oil
implied volatility and the stock implied volatility in China.
Briefly, using the implied volatility indices of the oil market and the
Chinese stock market, we investigate the impacts of oil market shocks
on the stock market in China under different market conditions. In par-
ticular, we test whether the oil implied volatility can affect the stock im-
plied volatility with lags and asymmetry. Our paper may make three
 J. Xiao et al. / Energy Economics 80 (2019) 297–309
important contributions to the existing literature. First, the studies on
the implied volatility linkages between oil and stock markets are
growing but ignore the heterogeneity linkages under different market
conditions. We use the quantile regression approach to address this
issue and further incorporate the asymmetric impacts of oil implied
volatility shocks. Second, we contribute to the existing literature by
testing the gradual information diffusion hypothesis in the implied
volatility relationships between oil and stock markets. Finally, investi-
gating the relationships between oil market and stock market in China
has become popular in recent years. However, very few papers focus
on this topic from the perspective of implied volatility indices. Our
paper extends this scarce literature by using the OVX and the newly
published VXFXI.
The remainder of this paper is organized as follows: Section 2
presents the literature review. Section 3 introduces the methodology.
Section 4 describes the data used in this paper. Section 5 provides the
empirical results and discussion. Section 6 concludes the paper.
2. Literature review
There have been considerable studies that investigate the relation-
ships between oil market and stock markets in developed and develop-
ing countries, but the results are mixed. In a pioneering work, Jones and
Kaul (1996) conclude that oil price changes have negative effects on the
stock returns in the US, the UK, Canada and Japan. Subsequently, using
various approaches such as vector auto regression (VAR), quantile re-
gression and capital asset pricing model, Sadorsky (1999), Basher and
Sadorsky (2006), Park and Ratti (2008), Lee and Zeng (2011), Basher
et al. (2012), Cunado and Perez de Gracia (2014), Diaz et al. (2016)
and Christoffersen and Pan (2018) also provide evidence that oil market
shocks negatively affect the stock returns. However, El-Sharif et al.
(2005), Kilian and Park (2009), Narayan and Narayan (2010) and
Arouri and Rault (2012) find that the impacts of oil market shocks on
the stock returns are positive. Additionally, Henriques and Sadorsky
(2008), Apergis and Miller (2009), Mohanty et al. (2010) and
Alsalman (2016) report that there don't exist significant linkages be-
tween oil and stock markets.
In existing literature, some papers also pay their attention to inves-
tigate the lagged impacts of oil price changes on the stock returns
based on the gradual information diffusion hypothesis. For instance,
using the ordinary least squares (OLS) regression, Driesprong et al.
(2008) show that oil price changes have strong predictive power for
the stock returns of most countries in the world. Especially, the relation-
ships between lagged oil price changes and stock returns are strength-
ened once the lags of several trading days of oil price changes are
introduced. The remarkable findings are consistent with the gradual in-
formation diffusion hypothesis. Applying similar empirical framework,
Fan and Jahan-Parvar (2012) find that the results of the lagged impacts
of oil price changes on the US sectoral stock returns strongly support the
gradual information diffusion hypothesis. Narayan and Sharma (2011)
and Phan et al. (2015) also confirm that the lagged impacts of oil price
changes on the firm returns are due to the delayed reaction of investors
to information in the oil market. In short, these studies provide strong
evidence to support the gradual information diffusion hypothesis in
the return relationships between oil and stock markets.
Another strand of the literature extends existing research from non-
linear or asymmetric perspective and finds that oil price changes can
also affect the stock returns by nonlinear or asymmetric channel. For ex-
ample, employing a model that nests symmetric and asymmetric re-
sponses to positive and negative oil price changes, Alsalman and
Herrera (2015) find that oil price changes can asymmetrically affect
some sectoral stock returns which are not closely related to energy.
Narayan and Gupta (2015) provide evidence that the negative oil
price changes have greater predictive power for the US stock returns
than the positive oil price changes by applying a predictive regression
model. Ghosh and Kanjilal (2016) report that the oil price shocks
299
and the Indian stock returns have stronger nonlinear linkage after the
2008 financial crisis by using a nonlinear cointegration test. Salisu and
Isah (2017) find that the impacts of oil price changes on the
stock returns in oil exporting and oil importing countries are asymmet-
rical via the nonlinear panel autoregressive distributed lag (ARDL)
model.
At present, it has been popular to examine the relationships between
oil market and stock market in China due to the important role of China
in the global economy and oil market. However, the results are not also
consistent. Some papers including Cong et al. (2008), Driesprong et al.
(2008), Zhang and Cao (2013) and Fang and You (2014) find that the re-
lationships between oil price changes and stock returns in China are not
significant. However, more papers provide evidence that oil market
shocks have significant effects on the stock return in China. For example,
Broadstock et al. (2012) report that the impacts of oil price changes on
the energy related stock returns in China are significantly positive
after the 2008 financial crisis by using asset pricing models. Based on
the extreme value theory, Chen and Lv (2015) provide evidence that
the extreme dependence between the oil price changes and the stock
returns in China is positive. Employing a quantile regression approach,
Zhu et al. (2016) find that the impacts of oil price changes on the
sectoral stock returns in China are significantly positive in bearish
markets. Using the VAR model, Luo and Qin (2017) find that the oil
market uncertainty measured by the OVX has a negative effect on the
Chinese stock returns. You et al. (2017) provide evidence that the
positive and negative changes of oil prices have significantly positive
effects on the sectoral stock returns in China under different market
conditions by applying the panel quantile regression. Based on the
structural VAR model and the nonlinear ARDL model, Hu et al. (2018)
find that the aggregate demand shocks of oil prices show asymmetric
effects on the Chinese stock returns in short run. Using the nonlinear
ARDL model and the nonlinear Granger causality test, Wen et al.
(2018b) provide evidence that the nonlinear linkages between oil
price changes and sectoral stock returns in China mainly appear in
short run and the volatility persistence is the resource of these nonlinear
linkages. Apply the quantile regression approach, Xiao et al. (2018) find
that the positive OVX changes rather than the negative OVX changes
negatively affect the Chinese stock returns in bearish periods, but
such impacts are weakened by the refined oil pricing reform of
March 27, 2013.
The aforementioned studies mainly examine the impacts of oil
market shocks on the stock returns without exploring the volatility
relationships between the two markets. Recently, there have been
increasing papers focusing on this issue. For instance, Malik and
Hammoudeh (2007) find significant volatility transmission among
the oil market, the US stock market and the stock markets in Saudi
Arabia, Kuwait and Bahrain by employing a multivariate generalized
autoregressive conditional heteroskedasticity (GARCH) model.
Malik and Ewing (2009) employ bivariate GARCH models to find
that there exist significant volatility transmission between the oil
prices and the US sector indices. Using a VAR-GARCH model, Arouri
et al. (2011) find that the volatility spillovers are bidirectional
between oil market and stock market in the US, but usually unidirec-
tional from oil market to stock market in Europe. Bouri (2015a) also
applies the VAR-GARCH approach to investigate the volatility
linkages between the oil market and the Lebanese stock market
and find that their volatility linkages increase during the 2008 finan-
cial crisis. Using a newly proposed causality-in-variance test, Bouri
(2015b) shows that the volatility spillover from the oil market to
the stock market in Jordan is stronger than the other way around.
Based on causality-in-variance tests, Bouri and Demirer (2016) re-
port unidirectional volatility transmission from oil prices to the net
exporting countries of Kuwait, Saudi Arabia and UAE. Dutta (2017)
investigates the relationships between the OVX shocks and the
realized volatility of clean energy stock returns by using the OLS re-
gression, and find that the information content of the OVX can be
300 J. Xiao et al. / Energy Economics 80 (2019) 297–309
used to forecast the realized volatility in the clean energy stock
market. Appling a GARCH model, Dutta et al. (2017) reveal that the
impacts of the OVX shocks on the realized volatility of most stock
markets in Middle East and African are significant even after
controlling for the effect of the US stock market uncertainty. As for
China, employing the cross-correlation function approach, Bouri
et al. (2017a) find the causality-in-variance is not significant after
the refined oil pricing reform of March 27, 2013. Peng et al. (2018)
confirm the asymmetric risk spillover from oil to firm returns in
China by using Value at Risk (VaR) estimation based on quantile
GARCH.
The studies above infer volatility relationships between oil and stock
markets by mainly using ARCH models or realized volatilities. However,
these volatilities are obtained from the price series, which only include
the historical market information and thereby cannot accurately mea-
sure the market uncertainty or risk. To address this shortcoming, a
few studies have begun to use implied volatility indices to investigate
the linkages between oil and stock markets, as these indices include
the historical information of market and the investors' expectation on
the future changes of market. For instance, Liu et al. (2013) confirm
that uncertainty transmission between implied volatility index of the
oil market and the implied volatility indices of the stock, exchange
rate and gold markets is significant in short term by using an ARDL
framework. Employing a set of directional measures, Maghyereh et al.
(2016) find that implied volatility spillovers mainly run from the oil
market to the stock markets. Based on an ARDL bound test and a
Kyrtsou-Labys nonlinear symmetric and asymmetric non-causality
test, Bouri et al. (2017b) report that in addition to cointegration rela-
tionships, there exist nonlinear and positive impacts of gold implied vol-
atility and oil implied volatility on the Indian stock implied volatility.
Bašta and Molnár (2018) use the wavelet methodology to find that
the implied volatility relationships between oil market and stock mar-
ket in the US are time-varying over time scale. Applying the ARDL
bound tests, Dutta (2018) provides evidence that there exist long-
run and short-run relationships between the oil implied volatility
and the implied volatility of the US energy sector stock market.
With respect to China, Ji et al. (2018) use the dynamic network to in-
vestigate the information transmission among the implied volatility
indices of the US stock market, the oil and the gold markets, and the
stock markets in BRICS (Brazil, Russia, India, China and South Africa).
The results show the US stock implied volatility plays the leading
role in the information transmission among these implied volatil-
ities. Additionally, the degree of implied volatility linkages among
stock markets is higher than that between commodity and stock
markets. Although a growing interest in investigating the implied
volatility relationships between oil and stock markets, much remains
unknown on this topic. For example, whether there has heterogene-
ity dependence between the oil implied volatility and the stock im-
plied volatility under different market conditions, and whether the
lagged relationships between the oil implied volatility and the
stock implied volatility strongly support the gradual information dif-
fusion hypothesis.
This paper aims to extend the existing literature by investigating
the impacts of oil implied volatility shocks on the stock implied vol-
atility in China with respect to different market conditions. We use
the quantile regression approach to address this issue referring to
other papers such as Zhu et al. (2016) and Xiao et al. (2018). Addi-
tionally, we examine the lagged linkages between the oil implied
volatility and the Chinese stock implied volatility based on the grad-
ual information diffusion hypothesis, because little work tests this
hypothesis in the implied volatility relationships. Finally, in terms
of the framework of quantile regression, we test whether the re-
sponse of stock implied volatility in China to the positive and nega-
tive shocks of oil implied volatility is asymmetric, as very few
studies pay attention to the asymmetric implied volatility linkages
in extreme market conditions.
3. Methodology
3.1. Basic regression models
This paper aims to investigate the impacts of oil market shocks on
the stock market in China by using the implied volatility indices. The
benchmark regression equation is estimated as follows:
ΔVXFXIt ¼ α þ βΔOVX t þ θΔVXFXIt−1 þ εt ð1Þ
In this equation, ΔVXFXIt is the VXFXI change in time t, ΔOVXt denotes
the OVX change in time t, and ΔVXFXIt−1 denotes the VXFXI change in
time t-1, which is used to control for autocorrelation.
Notably, there is a view that the implied volatility index of the US
stock market (VIX) is a source of risk for other international financial
markets and is closely related to the OVX (Liu et al., 2013; Bekiros
et al., 2017; Ji et al., 2018; Lucey, 2018). Some papers also select the
VIX as the crucial control variables when they investigate the volatility
transmission between oil market and non-US stock markets (Dutta
et al., 2017). Hence, we further estimate the following regression
equation including the VIX:
ΔVXFXIt ¼ α þ βΔOVX t þ γΔVIX t þ θΔVXFXIt−1 þ εt ð2Þ
where ΔVIXt denotes the VIX change in time t.
Furthermore, according to the gradual information diffusion hypoth-
esis, oil market shocks might affect stock market with lags, as investors
underreact to oil market information. To test this hypothesis in the rela-
tionships between the OVX changes and the VXFXI changes, we propose
the following regression equation:
8
ΔVXFXIt ¼ α þ ∑i¼0 βi ΔOVX t−i þ γΔVIX t þ θΔVXFXIt−1 þ εt ð3Þ
Within this framework, following Driesprong et al. (2008), Narayan and
Sharma (2011) and Phan et al. (2015), we set the lag length to eight,
which is sufficient to capture the lagged effects. Additionally, the
contemporaneous relationships are incorporated to control for the
contemporaneous effects and facilitate comparison with the lagged re-
lationships. Similar framework that includes contemporaneous and
lagged relationships can be found in other papers (such as Driesprong
et al., 2008; Narayan and Sharma, 2011; Lucey, 2018).
Finally, some studies have showed that oil market shocks can
asymmetrically affect stock market (e.g., Alsalman and Herrera, 2015;
You et al., 2017; Xiao et al., 2018). In terms of these empirical evidences,
we test whether the increase and decrease in the oil market uncertainty
have asymmetrical effects on the stock market uncertainty in China.
To achieve this research purpose, we first decompose the OVX changes
into the positive OVX changes and the negative OVX changes by
defining two auxiliary variables ΔOVX+ t = max (0, ΔOVXt) and
ΔOVX− t = min (0, ΔOVXt). Then, we develop the following regression
equation:
ΔVXFXIt ¼ α þ β1 ΔOVX þ −
t þ β 2 ΔOVX t þ γΔVIX t þ θΔVXFXIt−1 þ εt ð4Þ
3.2. Quantile regression models
The OLS regressions in section 3.1 can capture the average relation-
ships between the oil implied volatility and the stock implied volatility
in China, but hardly assess the linkages between the two variables in ex-
treme market conditions. We apply the quantile regression approach
proposed by Koenker and Bassett (1978) in order to account for the de-
pendence structure of the investigated variables with respect to differ-
ent market conditions. The quantile regression, as the extension of the
OLS regression approach, has two important advantages: on the one
hand, it provides a more complete picture of a conditional distribution
of dependent variables, which allow distinguishing the degree of impact
 J. Xiao et al. / Energy Economics 80 (2019) 297–309 301

of independent variables at different market conditions (such as normal Table 1

and extreme market conditions); on the other hand, the estimates of Descriptive statistics of all variables.

quantile regression approach are robust to outliers, heteroskedasticity, ΔOVX ΔVXFXI ΔVIX
and skewness on the dependent variables (Koenker and Hallock, Mean −0.0003 −0.0003 −0.0004
2001), this approach therefore provides more accurate estimation re- Median −0.0034 −0.0042 −0.0049
sults than the standard regression approach. According to Koenker Maximum 0.4250 0.3658 0.7682
and Bassett (1978), the quantile regression approach of yi given xi is Minimum −0.4399 −0.2028 −0.3141
Std. dev. 0.0483 0.0515 0.0779
specified as follows:
Skewness 0.7868 0.9091 1.1885
Kurtosis 13.9965 7.2470 11.2408
Q yi ðτjxÞ ¼ α ðτÞ þ x0i βðτÞ ð5Þ Jarque-Bera 9249.8030*** 1599.8360*** 5513.9600***
ADF −44.2941*** −43.9181*** −45.1848***
In this equation, Q y i(τ| x) denotes the τ-th conditional quantile of yi and PP −46.7983*** −46.1591*** −52.0518***
KPSS 0.0651 0.0255 0.0355
0 b τ b 1. α(τ) depicts the unobserved effect. β(τ) is the estimate in the
quantile regression. x includes variables that are assumed to affect the Note: “***” denotes significance at the 1% level.
dependent variable y. β(τ) is estimated as:

been calculated and published since March 16, 2011, our data cover
^ ðτÞ ¼ arg min
β
n 0
β ∈ RP ∑i¼1 ρτ yi −xi β ðτ Þ−α ðτ Þ ð6Þ the period from March 16, 2011 to May 9, 2018. Our empirical analyses
are conducted with the changes in the implied volatility indices,
where ρτ(u) = u(τ − I(u b 0)) is the check function and I(∙) is an calculated as the difference between the natural logarithm of prices.
indicator function (u = yi − x′i β(τ) − α(τ)). Fig. 1 illustrates the movements of the OVX and the VXFXI during the
In order to investigate the impacts of the OVX changes on the VXFXI sample period. As shown in this figure, the two volatility indices move
changes under different market circumstances, the quantile regression closely together across time. Moreover, the figure shows several major
framework of Eqs. (1)–(4) can be now expressed as follows: spikes in these indices during similar periods, and these spikes seem
to be closely related to some important economic and political events.
Q ΔVXFXIt ðτjxÞ ¼ α ðτ Þ þ βðτÞOVX t þ θΔVXFXIt−1 ð7Þ For instance, the first spike of the two indices appearing in august
2011 can be attributed to the US and European debt default risk (Liu
Q ΔVXFXIt ðτjxÞ ¼ α ðτ Þ þ βðτÞΔOVX t þ γ ðτÞΔVIX t þ θðτÞΔVXFXIt−1 ð8Þ et al., 2013). Furthermore, several spikes occur during the period from
2015 to 2016. As for the OVX, these spikes are trigged by the oversupply
8
Q ΔVXFXIt ðτjxÞ ¼ α ðτ Þ þ ∑i¼0 βi ðτ ÞΔOVX t−i þ γðτ ÞΔVIX t of crude oil, the declining demand, the strong US dollar or the Iran nu-
þ θðτ ÞΔVXFXIt−1 ð9Þ clear deal (Dutta, 2018). As to the VXFXI, these hikes take place due to
the Chinese stock market crisis.
Q ΔVXFXIt ðτjxÞ ¼ α ðτ Þ þ β1 ðτÞOVX þ −
t þ β 2 ðτ ÞOVX t þ γ ðτ ÞΔVIX t
Table 1 reports the descriptive statistics of changes in the OVX,
þ θðτ ÞΔVXFXIt−1 ð10Þ VXFXI and VIX. The standard deviation suggests that the unconditional
volatilities of the OVX changes and the VXFXI changes are similar but
This paper selects seven quantiles, namely, τ= (0.05, 0.10, 0.25, 0.50, are smaller than that of the VIX changes. According to the skewness
0.75, 0.90, 0.95). τ= (0.05, 0.10, 0.25) denotes the extreme markets and kurtosis, the distributions of all variables seem to be non-normal.
with lower expected volatility, namely, the bullish markets. In contrary, The Jarque-Bera test statistics for normality also reject the null hypoth-
τ= (0.75, 0.90, 0.95) denotes the extreme markets with higher ex- esis for all variables. These results provide further motivation to use the
pected volatility, namely, the bearish markets. Additionally, τ= (0.50) quantile regression, as the OLS regression assumes that the error term is
denotes the normal market. distributed normally. Additionally, this paper uses the Augmented
Dickey-Fuller (ADF) test, the Phillips-Perron (PP) test and the
4. Data Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test to examine whether
the OVX changes, the VXFXI changes and the VIX changes are stationary
Daily data on the implied volatility indices of the oil market, the time series. The null hypothesis of the ADF and PP tests is that the time
Chinese stock market and the US stock market are used in this paper series has a unit root against the alternative of stationarity, while the
and are obtained from the CBOE official website. As the VXFXI has just null hypothesis of the KPSS test is that the time series is stationary.

80
OVX
VXFXI
70

60

50

40

30

20

10
2011/3 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 2018/3

Fig. 1. OVX and VXFXI from March 16, 2011 to May 9, 2018.
302 J. Xiao et al. / Energy Economics 80 (2019) 297–309

Table 2
Estimation results for impacts of the OVX changes on the VXFXI changes.

0.05 0.10 0.25 0.50 0.75 0.90 0.95 OLS

Panel A
Constant −0.0689*** −0.0524*** −0.0269*** −0.0039*** 0.0245*** 0.0559*** 0.0751*** −0.0001
ΔOVXt 0.3535*** 0.3060*** 0.3657*** 0.4028*** 0.4784*** 0.5955*** 0.5782*** 0.4410***
ΔVXFXIt−1 −0.1000*** −0.1177*** −0.0651** −0.0374 −0.0296 0.0125 0.0583 −0.0471**
R2(%) 7.66% 7.06% 6.14% 7.73% 8.93% 12.64% 15.02% 17.17%

Panel B
Constant −0.0579*** −0.0431*** −0.0225*** −0.0016* 0.0200*** 0.0448*** 0.0629*** −3.11E-05
ΔOVXt 0.1810*** 0.1505*** 0.1223*** 0.1627*** 0.1883*** 0.2148*** 0.2348*** 0.1638***
ΔVIXt 0.3375*** 0.3557*** 0.3602*** 0.3817*** 0.3887*** 0.4159*** 0.4791*** 0.3899***
ΔVXFXIt−1 −0.1106*** −0.0809*** −0.0472** −0.0211 −0.0032 0.0179 0.0831* −0.0283
R2(%) 26.26% 23.76% 22.57% 24.19% 25.86% 29.98% 32.41% 45.21%

Notes: Panel A reports the results based on Eqs. (1) and (7). Panel B reports the results based on Eqs. (2) and (8). “***”, “**” and “*” denotes significance at the 1% level, the 5% level and the
10% level, respectively. R2 denotes adjusted R-squared.

The results of the three tests reported in the bottom of Table 1 show that Table 3
Quantile slope equality test for the OVX changes.
all variables used in our paper are stationary.
Panel A ΔOVXt 0.50–0.95*** 0.25–0.95*** 0.10–0.95*** 0.05–0.95***
5. Empirical results and discussion 0.50–0.90*** 0.25–0.90*** 0.10–0.90*** 0.05–0.90***
0.50–0.75** 0.25–0.75** 0.10–0.75*** 0.05–0.75**

5.1. Impacts of the OVX changes on the VXFXI changes
In this section, we use the quantile regression approach to explore
whether the OVX changes affect the VXFXI changes under different
market conditions, and second, whether the linkages between the
OVX changes and the VXFXI changes are still significant in the presence
of the US stock market volatility factor. To facilitate a comparison, we
also show the estimation results of the OLS regression, which is used
to investigate the average relationships between the OVX changes and
the VXFXI changes.
Panel A in Table 2 displays the estimation results of the OLS and
quantile regressions based on Eqs. (1) and (7). From the results of the
OLS regression, we observe that the impacts of the OVX changes on
the VXFXI changes are significantly positive at the average level. Accord-
ing to the results of the quantile regression, we find that the OVX
changes have significantly positive effects on the VXFXI changes across
all quantiles. In particular, the impacts of the OVX changes on the VXFXI
changes at upper quantiles tend to be stronger. The finding can be more
Panel B ΔOVXt 0.50–0.95 0.25–0.95 0.10–0.95 0.05–0.95
0.50–0.90 0.25–0.90*** 0.10–0.90* 0.05–0.90
0.50–0.75 0.25–0.75** 0.10–0.75 0.05–0.75
Notes: Panel A and Panel B show the quantile slope equality test for the OVX changes
based on Eq. (7) and Eq. (8), respectively. “***”, “**” and “*” denotes significance at the
1% level, the 5% level and the 10% level, respectively.
clearly seen in Fig. 2. Additionally, we use the quantile slope equality
test to assess whether the estimates of the OVX changes have statisti-
cally heterogeneity between the upper quantiles and the other
quantiles. To reach our goal, we present the results whether the upper
quantiles (0.95, 0.90 and 0.75) have the same slope with the median
quantile (0.50) and the lower quantiles (0.25, 0.10 and 0.05). The results
of quantile slope equality test are reported in Panel A of Table 3, provid-
ing statistical support for our finding. Finally, with respect to the lagged
changes of the VXFXI, the estimate is significantly negative, implying
that the past information in the VXFXI can lower its current volatility.
Furthermore, as presented in Eqs.(2) and (8), we assess the relation-
ships between the OVX changes and the VXFXI changes after controlling

OVXt
.40

.35

.30

.25

.20

.15

.10

.05
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Quantile

Fig. 2. Quantile estimates based on Eq. (7). Notes: The plot shows the contemporaneous Fig. 3. Quantile estimates based on Eq. (8). Notes: The plot shows the contemporaneous
impacts of the OVX changes on the VXFXI changes across quantiles. The blue solid line impacts of the OVX changes on the VXFXI changes across quantiles. The blue solid line
with circles denotes the point estimates and the two solid red lines present the 95% with circles denotes the point estimates and the two solid red lines present the 95%
confidence bands. confidence bands.
 J. Xiao et al. / Energy Economics 80 (2019) 297–309 303

for the effects of the VIX changes. The results are reported in Panel B of
Table 2. Fig. 3 illustrates the quantile estimates for the OVX changes
based on Eq. (8). It is easily found from the results of the OLS regression
that although the VIX changes act as a moderator in the adopted regres-
sion, the average relationships between the OVX changes and the VXFXI
changes are still significantly positive. As regards the results of the
quantile regression including the VIX changes, the impacts of the OVX
changes on the VXFXI changes are still significantly positive across
quantiles and seem to become stronger at upper quantiles. Panel B of
Table 3 reports the results of the quantile slope equality test based on
Eq. (8). Due to a moderator of the VIX changes, these results of the
quantile slope equality test are not much evident compared to the re-
sults in Panel A of Table 3. However, some results still show that the es-
timates at upper quantiles (such as 0.90 and 0.75) have significant
differences with the estimates at lower quantiles (such as 0.25 and
0.10), which to some extent support our finding. Additionally, the esti-
mation results of the VIX changes included in our regressions are also
informative. First, the VIX changes have significantly positive effects
on the VXFXI changes, suggesting that greater volatility in the US
stock market leads to higher volatility in the Chinese stock market.
The similar results can be found in previous research (e.g., Bekiros
et al., 2017; Lucey, 2018). Second, according to adjusted R-squared,
the regressions incorporating the VIX changes can better describe the
relationships between the OVX changes and the VXFXI changes. There-
fore, it is necessary to control for the effects of the US stock implied vol-
atility when investigating the implied volatility relationships between
the oil market and the Chinese stock market.
Summarizing the results above, we can conclude that the impacts of
the OVX changes on the VXFXI changes are significantly positive, which
is similar to some studies on the implied volatility relationships be-
tween oil and stock markets (such as Maghyereh et al., 2016; Bouri
et al., 2017b). Moreover, we provide new evidence that the positive im-
pacts of the OVX changes on the VXFXI changes are common under dif-
ferent market conditions but tend to become stronger at the bearish
market. The positive volatility relationships above can be explained by
many reasons. For instance, high uncertainty in the oil market can be
translated into higher earnings uncertainty in the firms which are
closely related to oil (Maghyereh et al., 2016). Great oil price uncer-
tainty may lead to the fluctuations in the real economic activity (Jo,
2014), then increases the uncertainty in the stock market. High volatil-
ity in the oil market may also cause the volatility increase in the stock
market by tightening the funding constraints of speculators who are ac-
tive in the oil and stock markets (Christoffersen and Pan, 2018). The
stronger volatility linkages at upper quantiles may be attributable to
the following reasons. Firstly, in the recession stage, the firms often
take on more debt and trade slowly, reducing the risk tolerance and
the flow of new information (Bloom, 2014). Hence, the earnings
volatility of these firms may be increased more when faced with the
oil volatility shocks in this stage. Additionally, investors expect larger
market volatility and thus require higher risk compensation during
bearish periods. Because higher risk compensation means higher risk
aversion (He et al., 2018), investors may be more susceptible to shocks
of oil volatility shocks in the bearish condition, resulting in their stock
selling or option buying. This tendency raises market uncertainty. Sec-
ondly, during bullish periods, the economy grows rapidly and can offset
the adverse shocks from the oil market (You et al., 2017). As a result, the
effects of oil volatility shocks that lead to greater volatility in stock mar-
ket will diminish. Finally, Lao and Singh (2011) argue that in the Chinese
stock market, herding behavior is greater when the market is bearish.
Aloui et al. (2013) heighten that herding behavior is an important factor
in increasing the dependence between oil and stock markets during
bearish markets. Therefore, the stronger volatility relationship between
oil market and Chinese stock market during bearish markets may be ag-
gravated by the herding behavior. Notably, Zhu et al. (2016) and Xiao
et al. (2018) suggest that the response of stock returns in China to oil
market shocks doesn't significantly exist in the bullish market, yet we
find that there have significant volatility linkages under this market
condition. This may imply that the volatility relationships between oil
market and stock market in China are stronger than the return linkages
between the two markets during the bullish period.
5.2. Testing lagged impacts of the OVX changes
In the next section, we test the lagged impacts of the OVX changes
on the VXFXI changes based on the gradual information diffusion
hypothesis. According to existing studies on the test of the gradual in-
formation diffusion hypothesis (such as Driesprong et al., 2008; Fan
and Jahan-Parvar, 2012; Lu and Jacobsen, 2016), if our empirical results
strongly support the gradual information diffusion hypothesis, the fol-
lowing conditions should be satisfied: First, the magnitude of the lagged
impacts of the OVX changes on the VXFXI changes should be similar to
that of the contemporaneous impacts or even larger. Second, the lagged
impacts of the OVX changes should peak and then to decline as lag size
increases. Following these conditions, we propose Eqs. (3) and (9) to
perform our test.
Table 4 reports the estimation results based on Eqs. (3) and (9). Fig. 4
illustrates the lagged impacts of the OVX changes on the VXFXI changes
based on Eq. (9). The results of the OLS regression show that the esti-
mates of lagged relationships are significantly positive at lag 1, but
these estimates become weaker and mostly insignificant at other lags.
Moreover, the estimate of contemporaneous relationship is about two
times higher than of lag 1. We further use the Wald test for the hypoth-
esis of β0 = β1 to assess whether the contemporaneous estimate has
significant difference with the estimate at lag 1. As shown in Table 4

Table 4
Estimation results for testing lagged impacts of the OVX changes.

0.05 0.10 0.25 0.50 0.75 0.90 0.95 OLS

Constant −0.0569*** −0.0439*** −0.0226*** −0.0016* 0.0199*** 0.0452*** 0.0617*** 6.08E-05

ΔOVXt 0.1608*** 0.1406*** 0.1321*** 0.1526*** 0.1831*** 0.2535*** 0.2452*** 0.1703***
ΔOVXt−1 0.1166*** 0.0641*** 0.0700*** 0.0773*** 0.1139*** 0.1093** 0.1978*** 0.0965***
ΔOVXt−2 0.0103 0.0153 −0.0259 0.0050 0.0456 0.1069** 0.0975*** 0.0333*
ΔOVXt−3 −0.0486** −0.0392 −0.0469** −0.0065 0.0113 0.0284 0.0383 0.0013
ΔOVXt−4 −0.0269 −0.0101 −0.0072 −0.0011 −0.0081 0.0249 0.0156 −0.0074
ΔOVXt−5 −0.0942*** −0.0607** −0.0186 −0.0038 0.0248 0.0637 0.0913*** 0.0035
ΔOVXt−6 −0.0427 −0.0691** −0.0700*** −0.0543*** −0.0240 −0.0170 −0.0138 −0.0432**
ΔOVXt−7 −0.0439 −0.0570** −0.0111 0.0016 0.0296 0.0218 0.0351 0.0065
ΔOVXt−8 −0.0063 −0.0189 −0.0254 −0.0193 −0.0169 −0.0092 0.0169 −0.0171
ΔVIXt 0.3274*** 0.3523*** 0.3474*** 0.3835*** 0.3937*** 0.4203*** 0.4616*** 0.3880***
ΔVXFXIt−1 −0.1534*** −0.1136*** −0.0790*** −0.0620** −0.0800** −0.0292 −0.0721 −0.0728***
H0 : β0=β1 2.0938** 4.1499*** 1.8123* 1.9465* 1.3090 2.2405** 0.6776 2.6072***
R2(%) 27.46% 25.03% 22.99% 24.38% 26.31% 30.65% 33.93% 45.82%

Notes: H0 : β0=β1 is the null hypothesis of the Wald test for the difference between the estimates of the OVX changes at lag 0 and at lag 1. “***”, “**” and “*” denotes significance at the 1%
level, the 5% level and the 10% level, respectively. R2 denotes adjusted R-squared.
304 J. Xiao et al. / Energy Economics 80 (2019) 297–309

(see column 9, row 14), the result of this Wald test indicates statistical
support for the difference between the contemporaneous estimate
and the first-order lagged estimate of the OVX changes. From the
above analysis, it's not hard to find that the results of the OLS regression
don't strongly support the gradual information diffusion hypothesis.
Furthermore, we focus on the results of the quantile regression. It can
be observed that the lagged impacts of the OVX changes are positive
and significant at lag 1 across quantiles, suggesting that the first-order
lagged changes in the OVX can also widely affect the VXFXI changes
under different market conditions. However, compared to the contem-
poraneous estimates, the estimates of the OVX changes at lag 1 are com-
monly weaker at different quantiles. The Wald test also shows the
rejection for the null hypothesis of β0 = β1 at most quantiles (see row
14 of Table 4). In addition, as for the OVX changes at higher lags, there
are only a few scattered significant estimates at different quantiles.
More importantly, the degree of the impacts of the OVX changes at
higher lags doesn't become larger than that at lag 1. Hence, the gradual
information diffusion hypothesis isn't also strongly supported by the re-
sults of the quantile regression.
Additionally, following Driesprong et al. (2008) and Lu and Jacobsen
(2016), we use the adjusted R-squared to test gradual information diffu-
sion hypothesis. Fig. 5 plots the adjusted R-squared as a function of dif-
ferent numbers of trading days used as lags between the OVX changes
and the VXFXI changes in Eqs.(3) and (9). Clearly, the OLS regression
has the highest explanatory power for a lag of 1 trading day, while the
explanatory power rapidly decreases for the lags than 1 trading day.
The quantile regression shows similar results at many quantiles (such
as 0.95, 0.90, 0.75 and 0.05). Although the quantile regression at the
quantiles of 0.50, 0.25 and 0.1 appears a sudden raise in the explanatory
power for a lag of 6 trading day, the explanatory power for a lag of 1
trading day is still the highest. These results are not consistent with
Driesprong et al. (2008) and Lu and Jacobsen (2016) who find the stron-
gest lagged effects appear at larger lags. Hence, we argue that the results
based on the adjusted R-squared don't also strongly support the gradual
information diffusion hypothesis.
Summarizing the above results based on the OLS and quantile re-
gressions, although the lagged impacts of the OVX changes on the
VXFXI changes exist, such impacts mainly appear at lag 1. At the same
time, the contemporaneous relationships between the OVX changes
and the VXFXI changes are significantly larger than the lagged relation-
ships between the two variables. Therefore, we can conclude that the
delayed reaction of the VXFXI changes to the VIX changes is weak. In
other words, our finding indicates that the strong impacts of the OVX
changes on the VXFXI changes mainly exist in the short-term period.
This finding is not surprising as Peng and Ng (2012) report that the in-
formation transmission is faster through implied volatility linkages than
the return linkages. Also, Liu et al. (2013) and Lucey (2018) provide ev-
idence that the cross-market uncertainty transmission based on the im-
plied volatility indices is transient. The possible explanations for our
finding about the lagged impacts of the OVX changes on the OVXFXI
changes include the following aspects. Firstly, implied volatilities con-
tain market's expectation on future price movements and forecast vola-
tility better than the realized volatility derived from market returns
(Kenourgios, 2014; Luo and Qin, 2017). Accordingly, investors may

OVXt OVXt-1
.35 .30

.30 .25

.25 .20

.20 .15

.15 .10

.10 .05

.05 .00
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Quantile Quantile
OVXt-2 OVXt-3
.25 .20

.20
.15

.15
.10

.10
.05
.05

.00
.00

-.05
-.05

-.10 -.10
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Quantile Quantile

Fig. 4. Quantile estimates based on Eq. (9). Notes: The plot on the top left shows the contemporaneous impacts of the OVX changes on the VXFXI changes across quantiles. The other plots
show the impacts of the OVX changes from lag 1 to lag 8 on the VXFXI changes across quantiles, respectively. The blue solid line with circles denotes the point estimates and the two solid
red lines present the 95% confidence bands.
 J. Xiao et al. / Energy Economics 80 (2019) 297–309 305

OVXt-4 OVXt-5
.100 .20

.075 .16

.12
.050
.08
.025
.04
.000
.00
-.025
-.04
-.050
-.08

-.075 -.12

-.100 -.16
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Quantile Quantile
OVXt-6 OVXt-7
.12 .20

.08 .15

.04 .10

.00 .05

-.04 .00

-.08 -.05

-.12 -.10

-.16 -.15
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Quantile Quantile

OVXt-8
.08

.04

.00

-.04

-.08

-.12
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Quantile

Fig. 4 (continued).

evaluate the impacts of oil volatility shocks on the stock market better
based on the future market information included in implied volatilities,
thereby reducing their delayed reaction. Secondly, many financial mar-
ket traders have increased speculation, arbitrage and other activities in
the oil market in recent years, which promotes the financialization of
the oil market and intensifies the linkage between oil and stock markets
(Boldanov et al., 2016; Maghyereh et al., 2016). Maghyereh et al. (2016)
argue that the trading of these traders depends partly on the sentiment;
and the implied volatilities can track the sentiment of market partici-
pants. Thus, the implied volatility connectedness may provide addi-
tional information about the impact of the change in participants and
trading activities on the relationship between oil and stock markets. In
that sense, investors may further improve their insights on the impacts
of oil volatility shocks on the stock market. Finally, Driesprong et al.
(2008) point out that apart from the difficulty of assessing the effects
of oil price changes on the value of stocks, the lagged response of
stock returns to oil price changes is due to these effects showing up at
different points in time. In other words, the effect of new information
may last a long time in oil and stock market returns. However, com-
pared with market returns, the changes in implied volatility indices
are quite time sensitive and the cross-market implied volatility indices
show faster information transmission (Peng and Ng, 2012). Hence, the
shock from oil implied volatility index to stock implied volatility index
is likely to disappear in a short time.
Finally, we assess whether there exist heterogeneous impacts of the
OVX changes on the VXFXI changes at lag 1. As shown in row 4 of
Table 4, we can find that the estimates of the OVX changes at lag 1 are
similar among the quantiles except for the 0.95 quantile. In fact, it is
306 J. Xiao et al. / Energy Economics 80 (2019) 297–309

45.9 33.1

45.8 33.0

Adjusted R-squared (%)

45.7
Adjusted R-squared (%)

32.9

45.6
32.8
45.5
32.7
45.4
32.6
45.3
32.5
45.2

45.1 32.4

45.0 32.3
1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8

Lag size (OLS) Lag size (0.95 quantile)

30.6 26.5

30.5 26.4
Adjusted R-squared (%)

Adjusted R-squared (%)

30.4 26.3

30.3 26.2

30.2 26.1

30.1 26.0

30.0 25.9

29.9 25.8

29.8 25.7
1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8

Lag size (0.90 quantile) Lag size (0.75 quantile)

24.6 22.9

24.5
22.8
Adjusted R-squared (%)

Adjusted R-squared (%)

24.4
22.7

24.3

22.6
24.2

22.5
24.1

24.0 22.4
1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8

Lag size (0.50 quantile) Lag size (0.25 quantile)

24.3 27.2

24.2 27.0
Adjusted R-squared (%)
Adjusted R-squared (%)

24.1
26.8
24.0
26.6
23.9
26.4
23.8
26.2
23.7

23.6 26.0

23.5 25.8
1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8

Lag size (0.10 quantile) Lag size (0.05 quantile)

Fig. 5. The figure depicts the adjusted R-squared from the regression specified in Eqs. (3) and (9), with different lag sizes between the OVX changes and the VXFXI changes.
 J. Xiao et al. / Energy Economics 80 (2019) 297–309 307

Table 5 Table 7
Quantile slope equality test for the OVX changes at lag 0 and 1. Quantile slope equality test for the positive and negative OVX changes.

ΔOVXt 0.50–0.95* 0.25–0.95** 0.10–0.95** 0.05–0.95 ΔOVX+

t 0.50–0.95* 0.25–0.95** 0.10–0.95** 0.05–0.95***
0.50–0.90** 0.25–0.90*** 0.10–0.90*** 0.05–0.90** 0.50–0.90*** 0.25–0.90*** 0.10–0.90*** 0.05–0.90***
0.50–0.75 0.25–0.75 0.10–0.75 0.05–0.75 0.50–0.75*** 0.25–0.90*** 0.10–0.75** 0.05–0.75***

ΔOVXt−1 0.50–0.95*** 0.25–0.95*** 0.10–0.95*** 0.05–0.95 ΔOVX−

t 0.05–0.50*** 0.05–0.75*** 0.05–0.90*** 0.05–0.95***
0.50–0.90 0.25–0.90 0.10–0.90 0.05–0.90 0.10–0.50*** 0.10–0.75*** 0.10–0.90*** 0.10–0.95***
0.50–0.75 0.25–0.75 0.10–0.75 0.05–0.75 0.25–0.50 0.25–0.75* 0.25–0.90** 0.25–0.95*

Notes: The quantile slope equality test is performed based on Eq. 9. “***”, “**” and Notes: The quantile slope equality test is performed based on Eq. 10. “***”, “**” and
“*” denotes significance at the 1% level, the 5% level and the 10% level, respectively. “*” denotes significance at the 1% level, the 5% level and the 10% level, respectively.

clearly seen that the estimates at the 0.95 quantile is much larger than
the estimates at other quantiles. The results of the quantile slope equal-
ity test in Table 5 also provide statistical support. This means that the
impacts of the OVX changes on the VXFXI changes at lag 1 will signifi-
cantly increase when market condition become much worse. Addition-
ally, as seen in Table 4 and Table 5, the contemporaneous impacts of the
OVX changes on the VXFXI changes are significantly positive across
quantiles and evidently become larger at upper quantiles. These results
indicate that the contemporaneous relationships between the OVX
changes and the VXFXI changes are almost robust after considering
the lagged impacts of the OVX changes.
5.3. Testing asymmetric impacts of the OVX changes
In the final stage, we investigate the asymmetric impacts of the OVX
changes on the VXFXI changes based on Eqs. (4) and (10). Table 6 re-
ports the estimation results. In terms of the results of the OLS regression,
the estimates of the positive and negative OVX changes are both posi-
tive and significant, while the estimate of the positive OVX changes is
larger than that of the negative OVX changes. We further use the
Wald test to test whether the response of the VXFXI changes to the pos-
itive and negative OVX changes is asymmetric at the average level. The
result is also reported in Table 6 (see column 9, row 7). We find that the
Wald test fails to reject the null hypothesis of HO : β1 = β2, indicating
that there doesn't exist asymmetry in the average relationships be-
tween the OVX changes and the VXFXI changes.
With regard to the results of the quantile regression, we find that the
impacts of the positive OVX changes on the VXFXI changes are signifi-
cantly positive at all quantiles except for the 0.10 and 0.05 quantiles,
and such impacts are stronger at upper quantiles. However, although
the negative OVX changes can positively affect the VXFXI changes, the
significant relationships mainly exist in lower and median quantiles.
Clearly, Fig. 6 illustrates that the impacts of the positive OVX changes
on the VXFXI changes increase with the increase in the quantile, yet

Table 6
Estimation results for testing asymmetric impacts of the OVX changes.

0.05 0.10 0.25 0.50 0.75 0.90 0.95 OLS

Constant −0.0491*** −0.0383*** −0.0213*** −0.0029* 0.0150*** 0.0376*** 0.0518*** −0.0012

ΔOVX+ t −0.1619*** −0.0039 0.0849*** 0.1990*** 0.3438*** 0.4249*** 0.5156*** 0.1950***
ΔOVX− t 0.3940*** 0.3578*** 0.1745** 0.0947* 0.0401 −0.0276 −0.0351 0.1235***
ΔVIXt 0.3573*** 0.3474*** 0.3580*** 0.3786*** 0.3769*** 0.4283*** 0.4595*** 0.3893***
ΔVXFXIt−1 −0.1063*** −0.0538** −0.0493** −0.0226 −0.0123 −0.0010 0.0799 −0.0291*
H 0 : β1 = β2 −4.5539*** −1.7801* −1.1533 1.1426 3.8414*** 3.8053*** 2.3345** 1.3465
R2(%) 27.76% 24.24% 22.57% 24.23% 26.38% 30.66% 33.59% 45.24%

Notes: H0 : β1 = β2 is the null hypothesis of the Wald test for the difference between the estimates of the positive OVX changes and the negative OVX changes. “***”, “**” and “*” denotes
significance at the 1% level, the 5% level and the 10% level, respectively. R2 denotes adjusted R-squared.

Positive changes of OVXt Negative changes of OVXt

1.0 .8

0.8 .6

0.6
.4

0.4
.2
0.2
.0
0.0

-.2
-0.2

-0.4 -.4
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Quantile Quantile

Fig. 6. Quantile estimates based on Eq. (10). Notes: The plot on the left shows the contemporaneous impacts of the positive OVX changes on the VXFXI changes across quantiles. The plot on
the right shows the contemporaneous impacts of the negative OVX changes on the VXFXI changes across quantiles. The blue solid line with circles denotes the point estimates and the two
solid red lines present the 95% confidence bands.
308 J. Xiao et al. / Energy Economics 80 (2019) 297–309
the impacts of the negative OVX changes show the reverse results. The
results of the quantile slope equality test shown in Table 7 also support
the heterogeneous impacts of the positive OVX changes and the nega-
tive OVX changes between upper and lower quantiles, respectively.
Moreover, at upper quantiles, we find that the impacts of the positive
OVX changes on the VXFXI changes are much stronger than the negative
OVX changes, and the results of the Wald test for asymmetry reported in
row 7 of Table 6 reject the null hypotheses. Conversely, the negative
OVX changes have stronger effects on the VXFXI changes than the pos-
itive OVX changes at lower quantiles. This result is also confirmed by the
asymmetric test. Notably, although the positive OVX changes also show
stronger effects on the VXFXI changes at the median quantile than the
negative OVX changes, the asymmetric test fails to reject the null
hypothesis.
In conclusion, the conventional OLS regression doesn't reveal the in-
herent asymmetry in the linkages between the OVX changes and the
VXFXI changes, as it only assess the average effects. On the contrary,
the quantile regression reflects the asymmetric impacts of the OVX
changes on the VXFXI changes under different market conditions. To
be specific, during the bearish period, the positive OVX changes rather
than the negative OVX changes have the significant effects on the
VXFXI changes. In the bullish market condition, the negative shocks of
the OVX show stronger effects on the VXFXI changes than the positive
shocks. The findings for the asymmetric impacts of the OVX changes
on the VXFXI changes under different market conditions may be ex-
plained by the following reasons. Oil volatility shocks can deteriorate
various economic activities (Jo, 2014; Diaz et al., 2016). In that sense,
uncertainty increase in the oil market (the positive OVX changes) may
convey information on future falling economic activity, which can
make the bear market worse and thus aggravates earnings volatility of
firms. In addition, investors tend to be cautious during bearish periods,
which may increase their sensitive to bad news. Oil uncertainty increase
can be interpreted as bad news by investors, as they expect a falling
economy. Hence, investors may present stronger response to the posi-
tive shocks of the OVX at the bearish stage. Especially, investors may
pay more attention to bad news than good news in the bearish market
due to the irrational of the Chinese stock market (Wen et al., 2014; Zhu
et al., 2016), thus this phenomenon is further enhanced. During the
bullish market, as mentioned earlier, a prospering economy may reduce
the adverse effects of oil market shocks (You et al., 2017). Bloom (2014)
also argue that when economy is good, firms are trading actively and
then help to spread information, individuals have more confidence to
forecast the future market, and public policy is clear. These factors
may help to maintain market stability in the face with exogenous
shocks. Thus, the uncertainty increase in stock market caused by the
oil price uncertainty shocks will be limited at the bullish stage. Mean-
while, when market circumstances are better, investors become opti-
mistic and are easier attracted by the good news from other markets
(Lee and Zeng, 2011). The negative OVX changes denote uncertainty de-
crease in the oil market, which is seen as a good signal of a more stable
economy by investors. Thus, investors pay more attention to the nega-
tive OVX changes in the bullish market.
6. Conclusion
There has been increasing interest in using the implied volatility in-
dices to investigate the relationships between oil and stock markets, as
these indices are regarded as a better measure of the market uncertainty
and can track the sentiment of investors. However, scarce studies inves-
tigate the impacts of oil implied volatility shocks on the stock implied
volatility under different market conditions. Meanwhile, although the
relationships between oil market and stock market in China have
attracted considerable attention, there is some lack of knowledge
about their implied volatility linkages. To complement these shortcom-
ings, this paper focuses on the impacts of changes in the implied volatil-
ity index of the oil market (OVX) on the changes in the implied volatility
index of the Chinese stock market (VXFXI) by using a quantile regres-
sion approach. Also, we explore the lagged linkages between the OVX
changes and the VXFXI changes motivated by the gradual information
diffusion hypothesis, and study the inherent asymmetric response of
the VXFXI changes to the OVX changes.
Our empirical results based on the daily data from March 16, 2011 to
May 9, 2018 show that the impacts of the OVX changes on the VXFXI
changes are significantly positive across quantiles and tend to be stron-
ger at upper quantiles. These results are still robustness even after con-
trolling for the impacts of changes in the implied volatility index of the
US stock market (VIX). These results indicate that the volatility shocks
in the oil market to the stock volatility in China more easily occur in
the bearish period. Further, when testing the lagged relationships be-
tween the two variables, we find that the lagged impacts of the OVX
changes on the VXFXI changes across quantiles mainly appear at lag 1
and become weaker or insignificant at higher lags. And the contempora-
neous relationships between the two variables tend to be stronger than
the lagged relationships under different market conditions. These
results suggest that the implied volatility linkages between oil market
and stock market in China don't strongly support the gradual
information diffusion hypothesis. That is, the strong uncertainty trans-
mission from the oil market to the Chinese stock market is transient.
Finally, we find significant asymmetry in the linkages of the OVX
changes and the OVX changes. Specifically, the impacts of the positive
OVX changes on the VXFXI are larger than the impacts of the negative
OVX changes at upper quantiles, while the results are reverse at lower
quantiles.
Our empirical results may have some important implications for the
investors and policy makers in the current unstable economic and
financial circumstance. As for the investors, they should take full advan-
tage of the information provided by the implied volatility indices and
make timely decisions to respond the changes in the Chinese stock
market uncertainty caused by the shocks of oil market uncertainty.
Especially, they need to enhance their stock risk management and re-
duce stock investment when the oil market volatility increases in the
bearish period. On the contrary, they can pay less attention to the
stock market volatility derived from the oil market volatility during
the bullish market and increase their investment, as the negative OVX
changes play a main role in affecting the VXFXI changes. With respect
to the policymakers, they should further improve the basic mechanism
of Chinese stock market and develop rapid response mechanisms to
deal with the fast uncertainty information flow from the oil market to
the Chinese stock market. Importantly, they should take into account
the asymmetric volatility linkages between the two markets in mecha-
nism design. Additionally, policymakers should actively adopt some
strategies to guide investors in Chinese stock market toward maturity
in order to reduce the fear of the investors about the volatility increase
in the oil market at the bearish stage.
Acknowledgment
The authors would like to show their sincere gratitude to the support
given by the National Natural Science Foundation of China (nos.
71873146, 71873147, 71431008).
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