The directional volatility connectedness between crude oil and equity markets: New evidence from implied volatility indexes

In this paper, we use a set of newly introduced implied volatility indexes to investigate the directional connectedness between oil and equities in eleven major stock exchanges around the globe from 2008 to 2015. The inference on the oil-equity implied volatility relationships depends on Diebold and Yilmaz (2012, 2014, 2015) who proposed a set of directional measures that enable the dynamic and directional characterization of the relationships among financial variables. We find uniform results across the sample countries indicating that the connectedness between oil and equity is established by the bi-directional information spillovers between the two markets. However, we find that the bulk of association is largely dominated by the transmissions from the oil market to equity markets and not the other way around. The pattern of transmissions is varying over the sample period; however most of the linkages between oil and equities are established from the mid of 2009 to the mid of 2012 which is a period that witnessed the start of global recovery.