North American Journal of Economics and Finance xxx (xxxx) xxx

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North American Journal of Economics and Finance

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

The dynamic impact of oil price shocks on the stock market and
the USD/RMB exchange rate: Evidence from implied
volatility indices
Meiyu Tian a, Wanyang Li a, Fenghua Wen a, b, *
a
School of Business, Central South University, Changsha 410083, China
b
Supply Chain and Logistics Optimization Research Centre, Faculty of Engineering, University of Windsor, Windsor, ON, Canada

A R T I C L E I N F O A B S T R A C T

JEL classification: Using daily data from March 16, 2011, to September 9, 2019, we explore the dynamic impact of
C15 the oil implied volatility index (OVX) changes on the Chinese stock implied volatility index
C22 (VXFXI) changes and on the USD/RMB exchange rate implied volatility index (USDCNYV1M)
E44
changes. Through a TVP-VAR model, we analyse the time-varying uncertainty transmission ef­
G12
G15
fects across the three markets, measured by the changes in implied volatility indices. The
Q43 empirical results show that the OVX changes are the dominant factor, which has a positive impact
on the USDCNYV1M changes and the VXFXI changes during periods of important political and
Keywords:
Implied volatility indices economic events. Moreover, USDCNYV1M changes are the key factor affecting the impact of OVX
Oil market changes on VXFXI changes. When the oil crisis, exchange rate reform, and stock market crash
Chinese stock market occurred during 2014–2016, the positive effects of uncertainty transmission among the oil
The USD/RMB exchange rate market, the Chinese stock market, and the bilateral exchange rate are significantly strengthened.
Time-varying effect Finally, we find that the positive effects are significant in the short term but diminish over time.

1. Introduction

Research on the relationships between the oil market, exchange rates, and the stock market has been a popular topic since the past
decade (Basher et al., 2012; Gong & Dai, 2017; Roubaud & Arouri, 2018; Gomezgonzalez et al., 2020). Since international crude oil
trades are settled in USD, fluctuations in the USD against local currencies are the key factor transmitting and further changing the
impacts of oil price on the local stock market. Considering China’s pivotal position in the international oil market, a large number of
studies have focused on exploring the relationships among the oil market, the Chinese stock market, and the USD/RMB exchange rate
(Basher et al., 2012; Roubaud & Arouri, 2018; Bai & Koong, 2017; Wei, 2019; Huang et al., 2020). However, these studies mainly focus
on the impact of price shocks between markets during the crisis; the measurement of dynamic impact between multiple markets has
not received sufficient attention. The dynamic transmission of market uncertainty is related to the spread of future market risks and is
closely related to changes in investor sentiment (Phylaktis & Ravazzolo, 2005; You et al., 2017; Xiao et al., 2018; He, Zhou, & et al.,
2019; Wen, Min, & et al., 2019; Cao & Wen, 2019). Therefore, it is meaningful to investigate the volatility relationships among the oil
market, the Chinese stock market, and the USD/RMB exchange rate.
In the existing literature, several studies reveal the relationships among the volatilities of the oil market, the currency market, and

* Corresponding author at: School of Business, Central South University, Changsha 410083, China.
E-mail addresses: tmy_6528@163.com (M. Tian), 181611041@csu.edu.cn (W. Li), wfh@amss.ac.cn (F. Wen).

https://doi.org/10.1016/j.najef.2020.101310
Received 2 February 2020; Received in revised form 12 August 2020; Accepted 22 October 2020
Available online 28 October 2020
1062-9408/© 2020 Published by Elsevier Inc.

Please cite this article as: Meiyu Tian, North American Journal of Economics and Finance,
https://doi.org/10.1016/j.najef.2020.101310
M. Tian et al. North American Journal of Economics and Finance xxx (xxxx) xxx

the Chinese stock market by using lagged rates of return and estimated volatilities (Malik & Hammoudeh, 2007; Malik & Ewing, 2009;
Arouri et al., 2011; Bouri, 2015; Wen et al., 2016, 2018; Gong & Dai, 2017; Dutta et al., 2017; Mo et al., 2019; Chen & Zhu, 2019).
Although these studies often use GARCH models or the VAR family of models to study the markets’ realised volatility, the results only
include the markets’ historical information. Since the depths of the financial crisis in 2008, financial markets have become intricately
linked and the increasing instability shared across markets has strengthened the risk contagion effect. Under this condition, historical
information on market prices cannot provide enough information about future market expectations (Liu et al., 2013). Recently, there
was an interesting discovery: implied volatility reflects the value of the future market (Corrado & Miller, 2005). Implied volatility is
used to measure the relationship between the amount of investor fear and market expectations of future volatility (Andrada-Félix et al.,
2018; Wen, Xu, & et al., 2019) as it determines the spot pricing of the underlying assets. Therefore, it is regarded as an indicator of
systemic market risk (Singh et al., 2018). The Chicago Board Options Exchange (CBOE), the largest options marketplace in the United
States, has published a number of implied volatility indices, including the crude oil volatility index (OVX) and the Chinese stock
implied volatility index (VXFXI). Meanwhile, Bloomberg has published at-the-money (ATM) implied volatility indices, including the
USDCNY implied volatility index (USDCNYV1M). These implied volatility indices include not only the market’s historical information
but also investors’ anticipation for the future uncertainty and sentiment for market changes. As investor fear increases, an increase in
risk premiums and high implied volatility index values follow, leading to higher option prices (Maghyereh et al., 2016). Moreover,
compared with historical volatility measures using price series, the changes in implied volatility indices are more time-sensitive (Peng
and Ng, 2012) and cross-market implied volatility can provide more information in the short term (Fleming, 1998; Dutta et al., 2017;
Xiao et al., 2019; Tissaoui & Azibi, 2019). Until recently, there has been a growing stream of research on the volatility relationship
between the oil market and the financial markets through the application of implied volatility indices (Liu et al., 2013; Maghyereh
et al., 2016; Bouri et al., 2017; Basta & Molnar, 2018; Dutta, 2017). However, there is a lack of research on the role of exchange rates in
the dynamic impact of oil prices on the stock market through the application of implied volatility indices.
In this study, we aim to investigate the dynamic impact of oil price shocks on the Chinese stock market and the USD/RMB exchange
rate based on implied volatility indices. There are several reasons for choosing the Chinese market. First, China has become the world’s
largest oil consumer and the largest net oil importer (Energy Information Administration, 2014). Meanwhile, with China becoming the
second-largest economy, in the 18th People’s Congress in November 2012, the Chinese government expanded the credit line of
qualified foreign institutional investors (QFII) to attract a large number of global investors.
Second, given that capital flows and trading in these economies are mainly denominated in American dollars (USD), we consider
the role of national currency rates against USD in cross-market effects. Oil price volatility can affect stock market volatility by affecting
future cash flows, of which capital flows will be affected by exchange rate volatility. Third, the Chinese government has continuously
promoted the internationalization of the RMB over the past decade and Chinese crude oil futures were launched in March 2018, for
which the contracts were priced and settled in RMB. This could lead to the RMB and USD becoming the two settlement currencies in the
international crude oil market (Ji et al., 2019). Furthermore, as China is the largest net oil importer globally, the fluctuation of oil price
affects the volatility in the bilateral exchange rate and ultimately affects the local firm’s profit (Phylakti and Ravazzolo, 2005; Cho
et al., 2016; Nandha & Hammoudeh, 2007; Victor, 2019; Fassas & Siriopoulos, 2020; Dai et al., 2020). It is worth noting that VXFXI
index is used to track the 30-day forward volatility of the Chinese equity market. It is calculated as the underlying asset of the iShares
Trust FTSE China 25 Index Fund (FXI) (Fassas & Siriopoulos, 2020). While some Chinese companies’ shares trade in Hong Kong, their
asset income and cash flow are mostly denominated in RMB. Furthermore, since the ETF traded in US, fluctuations in the dollar will
have an impact on trading. Therefore, the changes in USD/RMB exchange rate uncertainty have an impact on the VXFXI changes. It is
important to consider the dynamic impact of oil prices on the Chinese stock market and the bilateral exchange rate from the
perspective of implied volatility. However, there are only few studies investigating the relationship between oil implied volatility and
Chinese stock implied volatility (Ji et al., 2018; Xiao et al., 2019) and they ignore the role of bilateral exchange rates.
This study explores the dynamic impact of oil implied volatility shocks on Chinese stock implied volatility and the USD/RMB
exchange rate implied volatility during the period from March 16, 2011, to September 9, 2019. First, we investigate the Granger
causality relationship and determine the direction of uncertainty transmission among OVX changes, USDCNYV1M changes, and VXFXI
changes. Next, by using a TVP-VAR model, we analyse and compare the dynamic impact of OVX changes on USDCNYV1M changes and
VXFXI changes. The possible contributions of this study are as follows: First, the number of studies on the relationship between the
implied volatility of the crude oil market and that of the Chinese stock market is increasing, but these studies do not consider the role of
the implied volatility of bilateral exchange rates. It is important for investors to pay much more attention to changes in the uncertainty
about the bilateral exchange rate, as it can optimise their portfolios and help them avoid risks. Second, we examine the time-varying
effects of OVX changes, USDCNYV1M changes, and VXFXI changes. The impact of OVX changes on USDCNYV1M changes and VXFXI
changes is changing over time, since the transmission of uncertainty between markets changes from 2011 to 2019. More importantly,
the short-term impact is significant, which means that the strong uncertainty transmission from the oil market to the Chinese stock
market and the bilateral exchange rate is fast.
The remainder of this paper is organised as follows: Section 2 presents the literature review. Section 3 introduces the empirical
methodology. Section 4 describes the data and Section 5 presents the empirical results and a discussion. Section 6 provides the
conclusions and policy implications.

2. Literature review

A large number of existing studies reveal that oil prices can affect stock prices in many ways. Mohanty et al. (2011) suggest that
rising oil prices may have a positive or negative impact on the future cash flow of a company, based on the cash flow hypothesis (Fisher,

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1930). Wherever oil is considered as an output or an input, this impact will continue to affect stock prices, dividends, and firms’ profits.
Moreover, Smyth & Narayan (2018) suggest that the impact of higher oil prices leads to higher interest rates. These are seen as dis­
counting the expected cash flows and inflation, thus resulting in reduced profits, dividends, and, consequently, stock returns. Addi­
tionally, Kollias et al. (2013) consider market sentiment to reveal that changes in oil prices are considered by market players as a
significant signal of changes in business performance, which affects the stock prices of the related companies.
Other studies have found that the exchange rate plays an important role in the relationship between oil and the stock market from
the perspective of price series. Golub (1983) suggest that an increase in oil prices will generate a current account surplus for oil ex­
porters and current account deficits for oil importers. The result could be a redistribution of wealth that could further affect exchange
rates. If the increased demand for dollars from oil exportiog countries is less than the reduced demand for dollars from oil importing
countries, there will be a surplus of dollars and the dollar will depreciate. Krugman (1983) find that rising oil prices increases the
income for oil exporters, and if these petrodollars are recycled back into dollars then the demand for dollars will rise in the short-run.
On the other hand, according to the portfolio rebalancing hypothesis put forward by Hau and Rey (2004), rising stock prices in the
domestic market will encourage investors to recoup profits from the domestic market and shifted to investing whatever country offers
the more productive investment opportunities. According to the return chasing hypothesis, when domestic markets outperform foreign
markets, domestic markets attract international investors (Kim & Wei, 2002; Kayalar et al., 2017). In such cases, foreign and domestic
capital flows will lead to changes in the demand for domestic currency, and further affecting the bilateral exchange rate.
In the existing literature, some studies also reveal information spillovers between oil and stock markets by using lagged rates of
return. Using ordinary least squares (OLS) regression, Driesprong et al.(2008) find that the significant relationship between inter­
national stock returns and lagged oil prices is enhanced when using lags of several trading days for stock returns and lagged oil price
changes. The results show that it is difficult for investors to respond quickly to the impact of information on the value of stocks, which
supports the gradual information diffusion hypothesis (Hong & Stein, 1999). Narayan and Sharma (2011) show the lagged impacts of
oil prices on the returns of American companies. Moreover, Phan et al. (2015) argue that investors do not respond to information about
oil price shocks in a timely manner because of the lagged impact of oil prices on firms’ returns. Using a network model, Huang, An,
Huang, and et al. (2017) also find multiscale lead-lag relations among the impact of oil prices on stock indices of major countries
around the world, which supports the hypothesis that oil price transmission among stock markets involves time lags. These results
reveal that the information spillover between oil and stock markets supports the gradual information diffusion hypothesis.
Using a new perspective for measuring the efficiency and quality of information transmission across markets during periods of
extreme uncertainty, Peng and Ng (2012) find that cross-market implied volatility indices exhibit faster information transmission than
the historical volatility measures based on the price series and the changes in implied volatility indices are more time-sensitive.
Moreover, an implied volatility index can be considered as a direct measure of market uncertainty. Liu et al. (2013) and Badshah
et al. (2018) provide evidence that implied volatility indices can reflect instantaneous information faster than the ex-post volatility
measures based on GARCH models. The results confirm significant short-term uncertainty transmission among the oil implied vola­
tility index, the US stocks implied volatility index, the EUR/USD exchange rate implied volatility index, and the gold price implied
volatility index. Maghyereh et al. (2016) suggest that implied volatility indices are better than historical volatilities at capturing the
volatility crossovers associated with market sentiment. Implied volatility spillovers are mainly transmitted from the oil market to the
stock market. Applying the Cholesky-factor vector autoregression variance decomposition method and using an implied volatility
index, Singh et al. (2018) showed that systemic shock spillovers between oil prices and nine major currency pairs could provide more
detailed information on risk contagion. Xiao et al. (2019) reveal that the significant link between OVX changes and VXFXI changes is
transient under different market conditions. Specifically, the impact of OVX changes on VXFXI changes does not support the gradual
information diffusion hypothesis. To summarise, the existing literature provides strong evidence that implied volatility indices show
faster information transmission than market returns and accurately measure the market uncertainty or risk.
Presently, there are only few studies focusing on the relationship between oil implied volatility and Chinese stock implied volatility.
Employing a dynamic network, Ji et al. (2018) use implied volatility indices to investigate the information transmission among the US
stock market, crude oil markets, the gold market, and the stock markets in BRICS (Brazil, Russia, India, China, and South Africa). The
empirical results show that the links among the implied volatility indices of the BRICS stock markets imply a high flow of information
and that the uncertainty in the US stock market plays a central role in the information transmission network, followed by the un­
certainty in the Chinese stock market and that in the Brazilian stock market. Xiao et al. (2019) use quantile regression to show that the
impact of changes in oil implied volatility on changes in Chinese stock implied volatility is positive and tends to be stronger in bearish
markets but mainly exists in the short run. However, the existing literature ignores the role of exchange rate implied volatility. Our
study aims to extend the existing literature by considering the role of implied exchange rate volatility in dynamic influences and
comparing the empirical results of using implied volatility index and the historical volatility. Since implied volatility index is sensitive
to time changes, the TVP-VAR model can reflect the details of cross-market implied volatility changes. Through these details, we can
know the change of market uncertainty information transmission and the change of investor sentiment. Therefore, we apply a TVP-
VAR model to show the transmission of uncertainty among the oil market, the Chinese stock market and the currency market
through the changes in their respective implied volatility indices during or after different important economic and political events.

3. Methodology

According to Primiceri (2005) and Wen, Zhang, and et al. (2019), the TVP-VAR model allows both the coefficients and var­
iance–covariance matrix to change over time. As an improvement on the standard VAR model, the time-varying coefficients can
capture the time variation in the lag structure of the TVP-VAR model and the time-varying variance–covariance matrix of the

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nonlinearities in the TVP-VAR model can also capture shocks responses at different time points. The TVP-VAR model can be defined as
follows:
∑
yt = ct + B1,t yt− 1 + ⋯ + Bs,t yt− s + A−t 1 εt (1)
t

⎧
⎨ yt is a vector of observed variables
where the Bi,t are k × k matrices of time − varying coefficients
⎩
the εt are i.i.d. (0, Ik )
In this equation,At is the lower triangular matrix
⎛ ⎞
10 ⋯ 0
⎜ α21,t ⋱ ⋱ ⋮⎟
At = ⎜⎝ ⋮ ⋱
⎟ (2)
⋱ 0⎠
αk1,t ⋯ αkk− 1,t 1
∑
and t is the diagonal matrix
⎛ ⎞
σ 1,t 0 ⋯ 0
∑ ⎜ ⋮ ⎟
=⎝ ⋮ 0⋱ ⋱ ⋱ ⋱ 0 ⎠ (3)
t
0 … 0 σ k,t
Additionally, the TVP-VAR model can be expressed as:
∑
yt = Xt βt + A−t 1 εt , t = s + 1, ⋯, n (4)
t
∑
In this equation of the TVP-VAR model, the parametersβt ,At , and t change over time. Furthermore, the parameters are assumed to
follow a random walk process under the framework

where
ht = (h1t , … , hkt ) with hkt = logσ 2jt , j = 1, …, k, t = s + 1,…,n
′

∑
βs+1 N(μβ0 , ) (8)
β0

∑
αs+1 N(μα0 , ) (9)
α0

∑
hs+1 N(μh0 , ) (10)
h0

The variance–covariance matrix of the TVP-VAR model is block diagonal

⎛ ⎛1 ∑0 ⎞⎞
0 0
⎛ 0 0 0 ⎟
εt ⎞ ⎜ ⎜
⎜ ⎟⎟
⎜ ⎜ β ⎟⎟
⎜ uβt ⎟ ⎜ ⎜ ∑ ⎟⎟⎟
⎝ ⎠ N ⎜ 0, ⎜ 0 ⎟
uαt ⎜ ⎜ 0 0 ⎟⎟
⎝ ⎝ α ⎟⎟⎠
uht ∑⎠
0 0 0
h

∑ ∑
where the parameters α and h are diagonal matrixes.
Primiceri (2005) suggest that the parameter smoothing estimation should be performed by Markov Chain Monte Carlo (MCMC)
using the entire available data set. It is important to note that the MCMC estimates are more efficient than the filtered estimates of the
parameters for the evolution of the unobservable states over time. Hence, to draw samples, we use the MCMC algorithm. For more
details about the MCMC method in the context of the TVP-VAR model, mathematic formulas, and theory, the reader is referred to
Nakajima et al., (2011).

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4. Data description and statistics

4.1. Implied volatility indices

In 1993, CBOE constructed and published the first volatility index (VIX) based on the S&P 500 Index, which attempted to provide
traders with information about the stock market volatility over the following 30 trading days. Since then, the index has been produced
on a real-time basis from S&P 500 stock index options (Whaley, 1993, 2000; Ludovic, 2020). With the success of the S&P 500 VIX, the
researchers created volatility indices to other financial market indices as well, such as the German Futures and Options Exchange
volatility index. Furthermore, Bloomberg provided ATM implied volatility data for currency pairs. In 2007, CBOE produced the OVX
Index, which measures crude oil price fluctuations. In 2011, CBOE launched an index for fluctuations in Chinese stock prices as well,
known as the VXFXI.
These implied volatilities do not only include the consensus of the market regarding future volatility but also contain a premium for
fear. Hence, implied volatility indices are more suitable for representing investors’ expectations for the future than realised or his­
torical volatility measures, as the latter provide less information on potential volatility and do not account for investors’ fear (Liu et al.,
2013; Maghyereh et al., 2016; Singh et al., 2018; Wen et al., 2020).

4.2. Preliminary data statistics

Compared to cross-market uncertainty information transmission based on market price returns, uncertainty information trans­
mission based on implied volatility index changes is faster (Peng & Ng, 2012; Badshah et al., 2018). Information transmission of great
magnitude may occur in a short period (Liu et al., 2013; Xiao et al., 2019; Lang and Auer, 2019; Li et al., 2019). Therefore, using
monthly estimates of the implied volatility index changes would result in loss of information. Furthermore, Nakamura and Steinsson
(2018) and Antonakakis et al. (2019) indicate that VAR-type models, monetary policy spillovers are possible in a ‘much cleaner’ style
based on high-frequency data, such as daily data, compared with lower frequency data such as monthly or quarterly data. Hence, we
collect daily observations of the implied volatility index changes to study the transmission effects in the short term.
Daily time series data (five workdays per week) on the implied volatility indices of the oil market, the Chinese exchange rate
(against USD), and the Chinese stock market are used. The data on crude oil and the Chinese stock market are obtained from the CBOE
official website. For the Chinese exchange rate, we used ATM implied volatility data from Bloomberg. As mentioned above, the
Bloomberg codes used are OVX for crude oil, USDCNYV1M for the USD/RMB exchange rate, and VXFXI for the Chinese stock market.
Since VXFXI has only been computed and published since March 16, 2011, the sample period was from March 16, 2011, to September
9, 2019. The empirical analyses are conducted using the changes in the implied volatility indices, calculated as the difference between
the natural logarithms of the prices.
Fig. 1 displays the movements of OVX, USDCNYV1M, and VXFXI during the sample period. The movement of the OVX and VXFXI
corresponds to the left Y-axis, and the movement of the USDCNYV1M corresponds to the right Y-axis. As the figure shows, the three
indices exhibited similar trends during the period, and the observed spikes seem to be similar and related to some important economic
and political events. For instance, the first spike of the OVX and the VXFXI occurred in August 2011, which may be attributed to
European and US risk (Liu et al., 2013), and the spikes in the USDCNYV1M are attributed to the US government shutdown in October
2013 under President Barack Obama (Sharma et al., 2019). Due to the impact of important economic and political events, the un­
certainty in the market increases which may convey information about future economic activity. Moreover, cross-market uncertainty
has increased investor concerns about future turmoil in financial markets, as they worry about an increase in investment risk and an
economic slowdown. To better understand the factors that affect the USD/RMB exchange rate and the Chinese stock market, their

Fig. 1. OVX, USDCNYV1M, and VXFXI from March 16, 2011, to September 9, 2019.

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M. Tian et al. North American Journal of Economics and Finance xxx (xxxx) xxx

interrelationships, and their link to the crude oil market, an analysis of the impacts of implied volatility index changes is required.
Table 1 shows the basic descriptive statistics of changes in OVX, USDCNYV1M, and VXFXI. Based on the standard deviations, the
unconditional volatilities of the OVX changes, USDCNYV1M changes, and VXFXI changes are not significantly different. The skewness
and kurtosis suggest that the disturbances of all the variables seem to be non-normal during the sample period. The Jarque-Bera
statistics for all the variables also reject the null hypothesis of normality very strongly. Additionally, to trace the trend behaviours
of OVX changes, USDCNYV1M changes, and VXFXI changes, the time series are examined for non-stationarity using the Augmented
Dickey-Fuller (ADF), the Phillips-Perron (PP) test and the Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test. The null hypothesis of the
KPSS test is that the time series is stationary; for the ADF and PP tests, it is that the time series has a unit root against the alternative
hypothesis of stationarity. As shown at the bottom of Table 1, the results of three tests prove that all the variables used are stationary.
Table 2 reports the correlations among the three variables. As expected, correlations for all pairs of implied volatility index changes
are positive and significant at the 1% level of significance. Furthermore, OVX changes and VXFXI changes have the highest positive
correlation, reflecting their stronger volatility relationship, similar to studies on implied volatility relationships between the oil and
stock markets. For instance, Xiao et al. (2019) suggest that the impact of OVX changes on VXFXI changes is positive and tends to be
stronger in bearish markets. The results indicate a positive correlation between VXFXI changes and USDCNYV1M changes; the reason
is that changes in the USD/RMB exchange rate have a significant influence on firm returns (Cuestas et al., 2018; Firdos et al., 2020).
The correlation between USDCNYV1M changes and OVX changes is relatively small, which can be explained as follows: There is a
significant risk spillover from oil returns to the USD/RMB exchange rate due to China’s launching of crude oil futures. However, the
Chinese government’s exchange rate control policy makes the exchange rate risk for the RMB comparatively smaller than that for the
USD and the dependence between oil prices and the Chinese currency rate is dynamic and weakly positive. In contrast, the dependence
between oil prices and the USD rate is negative, due to endogenous structural changes (Ji et al., 2019).

5. Empirical results and discussion

5.1. The granger causality tests

In this section, we investigate whether there are causal relationships among the OVX changes, USDCNYV1M changes, and VXFXI
changes in the VAR framework. We use the Granger causality test to study the direction of uncertainty transfer among OVX changes,
USDCNYV1M changes, and VXFXI changes. Further, we investigate that when two different indices changes are coexist, whether to
affect another changes.
According to the SBIC criterion, we set the optimum number of lags in the TVP-VAR model to 1 and follow the method proposed by
Nakajima (2011). Subsequently, the Granger causality tests are employed to investigate the direction of volatility transmission based
on lag (1) of the implied volatility indices changes.
Table 3 shows that VXFXI changes significant lead to USDCNYV1M changes. Further, when OVX changes and VXFXI changes are
assumed to occur simultaneously, they are found to significantly lead VXFXI changes. This finding is not surprising as Gong and Dai
(2017) report that RMB depreciation will generally reduce the attractiveness of Chinese stock and will induce herding, whereas stocks
valuation will benefit from an RMB appreciation. Huang, An, Gao, and et al. (2017) provide evidence that the synergic movement of
the real effective Chinese exchange rate and oil stock nexus and the Chinese stock market is affected by oil prices in the long term.
Furthermore, the OVX changes and the USDCNYV1M changes significantly lead to the VXFXI changes. Further, when assuming that the
OVX changes and the USDCNYV1M changes occur simultaneously, they are also found to lead the VXFXI changes. This is similar to the
results of Xiao et al. (2018) and Luo and Qin (2017), who suggest that the OVX changes have a positive effect on Chinese stock returns.
Wei et al. (2019) find that the Chinese currency rate against the US rate is the most important factor affecting the risk transfer from oil
prices to Chinese stock prices during the entire financial crisis periods. Hence, the Granger causality test result suggests that there is a
linkage between the three markets: (1) the OVX changes play an important role in the relationships among implied volatility index
changes; (2) the USDCNYV1M changes are one reason for the VXFXI changes. Therefore, according to the results of the Granger
causality tests, we determine the order of variables in TVP-VAR mode is △OVX, △USDCNYV1M,△VXFXI.

Table 1
Descriptive statistics of all the variables.
△OVX △USDCNYV1M △VXFXI

Mean − 0.0001 0.0004 − 0.0003

Median − 0.0029 − 0.0020 − 0.0033
Maximum 0.3278 1.6963 0.3658
Minimum − 0.2191 − 0.3446 − 0.2028
Std. dev. 0.0462 0.0643 0.0509
Skewness 1.0350 8.9049 0.9130
Kurtosis 9.1541 223.8309 7.4777
Jarque-Bera 3886*** 4.5e + 06*** 2155***
ADF − 9.980*** − 9.768*** − 11.786***
PP − 48.378*** − 40.352*** − 50.688***
KPSS 0.0305*** 0.0208*** 0.0107***

Note: “***” denotes significance at the 1% level.

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Table 2
Correlation matrix.
Correlation △OVX △USDCNYV1M △VXFXI

Probability

△OVX 1.0000
△USDCNYV1M 0.0735 1.0000
(0.0005***)
△VXFXI 0.4042 0.1694 1.0000
(0.0000***) (0.0000***)

Note: “***” denotes significance at the 1% level.

Table 3
Granger causality test for implied volatility indices changes.
Null hypothesis Chi-squared statistic Causality decision

△USDCNYV1M does not Granger Cause △OVX 1.4388

(0.230)
△VXFXI does not Granger Cause △OVX 0.82232
(0.365)
△USDCNYV1M and △VXFXI does not Granger Cause △OVX 2.6567
(0.265)
△OVX does not Granger Cause △USDCNYV1M 0.78987
(0.374)
△VXFXI does not Granger Cause △USDCNYV1M 29.322*** △VXFXI→△USDCNYV1M
(0.000)
△OVX and △VXFXI does not Granger Cause △USDCNYV1M 31.239*** △OVX,△VXFXI→△USDCNYV1M
(0.000)
△OVX does not Granger Cause △VXFXI 6.4376** △OVX→△VXFXI
(0.011)
△USDCNYV1M does not Granger Cause △VXFXI 5.3646** △USDCNYV1M→△VXFXI
(0.021)
△OVX and△USDCNYV1M does not Granger Cause △VXFXI 11.868*** △OVX,△USDCNYV1M→△VXFXI
(0.003)

Note: The table reports the results of the Granger causality tests for the log differences of the implied volatility indices. “→” indicate bidirectional and
unidirectional causality, respectively. Parentheses indicate the probability level.
*** Denotes significance at the 1% level.
** Denotes significance at the 5% level.
* Denotes significance at the 10% level.

5.2. TVP-VAR model

Table 4 presents the dynamics of the implied volatility index changes as estimated by the TVP-VAR model using the MCMC al­
gorithm. The Geweke statistics show that the null hypothesis of convergence to the posterior distribution cannot be rejected at the 95%
confidence intervals. Additionally, the 95% confidence intervals include the posterior means. Fig. 2 shows that the autocorrelation
coefficient converges to 0 as the number of simulations increases.
Fig. 3 shows the dynamics of the estimated stochastic volatilities of the implied volatility index changes over time, with σ2it =
exp(hit ) based on the posterior means. This figure indicates that implied volatility varies significantly over time and some high
volatility periods of implied volatility index changes can be observed. Fig. 4 shows the simulation relations of the structural shock
changes over time.

Table 4
Estimation results of implied volatility indices’ changes in the TVP-VAR model.
Parameter Mean Std. dev. 95%L 95%U Geweke Inef.
∑
( β)1 0.0198 0.0018 0.0165 0.0235 0.332 56.86
∑
( β)2 0.0197 0.0018 0.0166 0.0236 0.436 49.16
∑
( α)1 0.0312 0.0039 0.0247 0.0412 0.351 107.81
∑
( α)2 0.0423 0.0067 0.0309 0.0567 0.315 185.61
∑
( h)1 0.3606 0.0252 0.3156 0.4138 0.073 38.84
∑
( h)2 0.6562 0.0406 0.5773 0.7370 0.907 68.72

Mean: posterior mean; Std. dev.: standard deviation; 95%L: 95% lower credible interval limit; 95% upper credible interval limit; Geweke: Geweke
convergence diagnostics statistic; and, Inef.: inefficiency.

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Fig. 2. MCMC estimation results (sample autocorrelations, sample paths, and posterior densities).

Fig. 3. Posterior estimates of stochastic volatility of structural shocks.

5.3. The time-varying impulse analysis

In this section, following Liu et al. (2013), who discovered the significant short-term impacts among the implied volatility indices’
changes, we estimate the time-varying transmission of implied volatility changes for a one-day, two-day, and three-day horizons.
Figs. 5–7 report the time-varying impulse of the implied volatility indices’ changes transmitted from market i to market j during the
sample period. The results show that the trend is consistent across the three types of horizon. The time-varying impulse response is
large in amplitude in the one-day horizon but narrower after the two-day horizon.
As shown in Fig. 5, the OVX changes have an extremely significant positive effect on the USDCNYV1M changes during 2011–2013
and 2014–2016 and only in few cases do they have a negative influence during 2013–2014 and 2016–2019. The impact based on one
trading day exhibits the highest explanatory power, which may be explained by incomplete information about unexpected events
leading to high uncertainty in the market. With more information arriving in the subsequent periods, the effects would revert to the
mean. To be more specific, when the sudden outbreak of the 2011 Libyan war resulted in sharp cuts reducing oil production by 90%
and increasing Brent prices by 10%, many petrodollars were transferred from oil-importing countries to oil-exporting countries (Ji &
Guo, 2015; Chen et al., 2016). After that, the 2013 US government shutdown caused the USD rate to fall. The cost of foreign exchange
transactions added to the uncertainty of profits for firms closely related to oil and for the investors in foreign exchange markets
(Maghyereh et al., 2016; Malik & Umar, 2019). Therefore, the high uncertainty in the oil market was transmitted in a short period of
time, translating into high uncertainty in foreign exchange markets. Similarly, a positive effect was observed between August 2014 and
March 2016—the period of the crude oil crisis. Meanwhile, technological improvements in drilling enabled the United States to access
shale gas/oil reserves from overseas. The US energy production increased by 50% and the United States become a net exporter of crude
oil, surpassing Saudi Arabia. This led to a radical change: a negative relationship between the USD and crude oil for many years (Singh
et al., 2018). The USD has increased in value during this time. As regards China, the historic maximum drawdown of the Chinese

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Fig. 4. Simultaneous relation posterior estimates.

Fig. 5. Impulse responses of OVX changes to USDCNYV1M changes.

exchange rate occurred on August 11, 2015, when the new reference exchange rate policy was implemented. Subsequently, the
bilateral exchange rates risk changed and its risk was highly correlated with oil returns (Ji et al., 2019). As the oil crisis spread, the
uncertainty in the oil market led to uncertainty in the bilateral exchange rates. The uncertainty transmission through implied volatility
changes soared after mid-2014, indicating that investors were pessimistic about the long-term oil price trend and the bilateral ex­
change rate movements. Additionally, the negative effects were observed between mid-2013 and early 2014. A possible cause could be
that the quantitative easing of the United States has weakened. With the rapid appreciation of the USD against the world’s currencies
(and, hence, against the RMB as well), the relationship between oil and the USD has changed (Ji et al., 2019). Moreover, some positive
and negative effects are observed between 2016 and 2019. The reasons for the positive effects were (1) the OPEC’s agreement to
decrease production, (2) political brinkmanship, and (3) war events. However, after October 1, 2016, the RMB became one of the five
major currencies in the Special Drawing Rights basket, moving it closer to becoming a freely usable and convertible currency. On the
other hand, the RMB remains strong in the face of a stronger USD following the 2018 FED-raised rates. Despite the shock of uncertainty

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Fig. 6. Impulse responses of OVX changes to VXFXI changes.

Fig. 7. Impulse responses of USDCNYV1M changes to VXFXI changes.

in the oil market, the uncertainty about the exchange rate market gradually decreased. Furthermore, the impact effect has positive or
negative at different time points. A possible cause could be that the investors based on information from the previous trading day will
lead to speculative activity in the next trading day. In addition, oil market uncertainty fluctuations caused by oil demand have a great
impact on exchange rate fluctuations, but only in the short term (Malik & Umar, 2019; Roubaud & Arouri, 2018).
Fig. 6 shows that the impacts of the OVX changes on the VXFXI changes are different across the sampled period. The impact based
on one trading day exhibits the highest explanatory power but rapidly decreases starting with the second day. Sometimes, the impact
effect on the first trading day is different from the impact effect on the second day. The possible reason is that the movement of capital
between the oil market and the Chinese stock market on the first day of the trading day are influenced by bilateral exchange rate
changes and ultimately affects the stock market on the second day of the trading day (Li et al., 2018). An additional factor is that impact
of oil supply shocks on investment in China is positive while oil aggregate demand and specific demand shocks show negative effects
(Chen, Zhu, & et al., 2020; Chen, Li, & et al., 2020; Ye et al., 2020). During the period from 2011 to 2013, the OVX changes have a

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M. Tian et al. North American Journal of Economics and Finance xxx (xxxx) xxx

significantly positive impact on the VXFXI changes, which then turned into a negative impact. The first spike occurred between April
and November 2011, mainly affected by the Libyan War, which resulted in large shocks to the global oil supply. The second happened
during the period from January to May 2013 and may have been related to the US and European debt default risk. Specifically, the
contagion effect of uncertainty is gradually diminishing for the Chinese stock market (He, He, & et al., 2019), which can be mainly
attributed to China’s securities’ regulatory policy. However, uncertainty in the exchange rate market is the key factor transforming the
impacts of the OVX changes on the VXFXI changes, which makes the influence of OVX-VXFXI turn positive on the second day after the
event. During the period from 2017 to 2018, the OVX changes caused by the decrease in oil prices were seen as a positive sign for
economic development in oil-importing countries. Therefore, the OVX changes have a negative impact on the VXFXI changes.
Additionally, the positive impact of the former in 2019 seems to indicate the impact of the China-US trade conflicts on economic
growth and energy demand (Xia et al., 2019), which inhibits investor confidence and the future prospects of energy-related companies.
More importantly, during the oil crisis and the Chinese stock market crisis of 2014–2016, the VXFXI changes are positively impacted by
the OVX changes during bearish stock markets. Additionally, in the context of exchange rate reform, the USDCNYV1M changes further
affect VXFXI changes. The result suggests that the high uncertainty in the bilateral exchange rate dominates the other two indices
during the crisis, as a major risk transmission occurs between the oil market and the Chinese stock market.
Fig. 7 shows the impact of USDCNYV1M changes on the VXFXI changes over time. During the period of US and European debt
default risk and the US government shutdown of 2011–2013, the gradual decline of the US dollar increased the uncertainty in bilateral
exchange rates. This uncertainty can increase the uncertainty of the Chinese stock market and induce herding behaviour (Gong & Dai,
2017). Similarly, during the period from 2014 to 2015, the USDCNYV1M changes have significantly positive effects on the VXFXI
changes. Then, the RMB sustained depreciation against the USD when the central bank of China launched a series of policies in its 2014
exchange rate reform. When the exchange rate formation system reform finished, the RMB/USD rate depreciated 1.87% on August 11,
2015. That is the largest one-day drop in history, resulting in an unstable bilateral exchange rate. Meanwhile, the Chinese stock market
plummeted. As investors respond strongly to bad news, high uncertainty in the bilateral exchange rate may translate into an expec­
tation for high uncertainty in the Chinese stock market. The findings support previous research findings that emerging markets benefit
from national currency appreciation due to the foreign capital flows into these markets. In contrast, national currency depreciation is
seen as ‘bad’ news in these stock markets (Lin, 2012). During the period from 2017 to 2019, the Chinese stock market is gradually
included by MSCI, which attracted great amounts of foreign capital. Although the bilateral exchange rate has appreciated slightly, this
will significantly decrease the profits of enterprises in major importing countries (Sui & Sun, 2016). When the uncertainty in the
exchange rate market decreases, this has a positive impact on the uncertainty in the stock market. Therefore, the USDCNYV1M changes
have a negative impact on the VXFXI changes since 2017.
Summarising the results above, with more information arriving in the subsequent periods, the effect reverts to the mean. This result
shows that investors can better evaluate the impact of risk shocks between markets based on future market information contained in
implicit volatility, thereby reducing the delay in their reaction. This finding is not surprising as Xiao et al. (2019), using quantile
regression, discovered the lagged impact of the OVX changes on VXFXI changes, which mainly appears at lag 1. Therefore, the result
does not support the gradual information diffusion hypothesis. Moreover, Peng and Ng (2012) indicate that cross-market implied
volatility can deliver market information rapidly and accurately. Furthermore, implied volatility indices’ changes can be considered as
bad news or as good news (Xiao et al., 2018). In interconnected financial markets, investors’ trading behaviour in the short-term is
more reactive to bad news than to good news (Zhu et al., 2016).
In addition, according to Figs. 5 and 7, fluctuations in the oil market affect the demand for petrodollars and eventually lead to
fluctuations in bilateral exchange rates. Given that capital flows and trading in the international market are mainly denominated in
American dollars (USD), the fluctuations of national currency rates against USD will affect the cost of international capital inflows and
the cost of the outflow of domestic capital. The fluctuations in the rapid movement of short-term capital can influence investors’
decisions and the share prices of local companies (Li et al., 2018). Especially in the bear market, when the stock market is impacted by
the fluctuation of the oil market, the fluctuation of the exchange rate market will further aggravate the turbulence of the stock market
(Sui & Sun, 2016; Chen, Zhu, & et al., 2020).

5.4. Impulse analysis of different points

In this section, we estimate the static impulse responses at different points. Compared with traditional impulse responses based on
the VAR model, the static impulse responses based on the TVP-VAR model can consider multiple time points by testing and supple­
menting previous dynamic impulse results.
Given that a highly significant transfer of uncertainty across markets can be observed during 2015–2016, we chose three time
points to discuss: (1) the Chinese stock market crash, which began on June 15, 2015; (2) the RMB/USD depreciation due to the Chinese
exchange rate formation system reform, which ended on August 11, 2015; and, (3) the oil prices’ slump on December 21, 2015. The
three time points correspond to an increase in the VXFXI changes, an increase in the USDCNYV1M changes, and an increase in the OVX
changes, respectively.
As shown in Figs. 8–10, the time-varying transmission of uncertainty across markets is strongly significant and positive, influenced
by the increases in the implied volatility indices’ changes in such a short time. However, that influence gradually weakened, as on the
fifth day, the indices’ changes return to average. Fig. 8 shows that the OVX changes have a positive effect on the USDCNYV1M changes
due to the impact of the three time points but this impact of each time points different. The impact of the oil prices’ slump is greater
than that of the USD/RMB shock, which is greater than the impact of the Chinese stock market crash. The result is similar to the one
observed in Fig. 9. When the OVX changes have significantly positive effects on the VXFXI changes, these effects mainly deteriorate due

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M. Tian et al. North American Journal of Economics and Finance xxx (xxxx) xxx

Fig. 8. The different responses of OVX changes to USDCNYV1M changes.

Fig. 9. The different responses of OVX changes to VXFXI changes.

to the impact of the oil prices’ slump and the impact of the USD/RMB shock. However, as shown in Fig. 10, when the USDCNYV1M
changes have significantly positive effects on the VXFXI changes, these effects mainly deteriorate due to the impact of the USD/RMB
shock and the impact of the Chinese stock market crash. These results suggest that the impact of the three time points on the three kinds
of cross-market uncertainty transmissions is not always similar, although the three kinds of cross-market uncertainty transmission are
caused by the same events. One possible reason is that, in addition to common economic fundamentals, each type of implied volatility
index changes is primarily influenced by its own specific or incidental market factors (Liu et al., 2013; Mo et al., 2019). Another
possible cause could be that the media attention to OPEC’s decisions is much higher when the unexpected developments in the
economy and the financial crisis occurred, increasing the potential impact of these emergencies on oil demand (Plante, 2019; Razek &
Michieka, 2019). The pricing of oil by OPEC affects the demand for petrodollars and ultimately the bilateral exchange rate. In this case,
losses in both the stock and bilateral exchange markets are high for the investor with long positions. Meanwhile, multinational

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Fig. 10. The different responses of USDCNYV1M changes to VXFXI changes.

manufacturing companies and experience the negative effects of USD/RMB fluctuations, which further affect the corporate profits and
share prices.

5.5. The comparative experiment

In this section, we investigate whether the time-varying transmission based on price changes is different from that based on implied
volatility changes. We consider daily data (five workdays per week) for the oil price (WTI), the USD/RMB exchange rate (USDCNY),
and the Chinese stock market index (SHCI) covering the sample period from March 16, 2011, to September 9, 2019. We mainly es­
timate the time-varying transmission of historical volatility changes for a one-day, two-day, and three-day horizons. The empirical
analyses are conducted using the changes in the mark price indices, calculated as the difference between the natural logarithms of the
prices. For comparison, the order of model variables is set as follows △WTI, △USDCNY, △SHCI. In the interests of saving space, only
a number of the main results are presented.
Table 5 shows that the variables used are stationary. Table 6 presents the dynamics of the history volatility changes as estimated by
the TVP-VAR model using the MCMC algorithm. Fig. 11 shows the dynamic impact of WTI changes on USDCNY changes, which is not
obvious in the short term. Fig. 12 shows that the dynamic impact of WTI changes on SHCI changes cannot show a detailed change
process in the short term, except in the case of oil crisis and the Chinese stock market crisis of 2014–2016. Fig. 13 illustrates that the
dynamic impact of USDCNY changes on the SHCI changes is positive on the first day, but changes after the second day. The results are
basically similar to the results shown in Table 7. Compare Figs. 5–7 with Figs. 11–13, We can find that time-varying effects calculated
based on historical volatility are insensitive in the short term, indicating the cross-market uncertainty information transmission based
on mark price is slower than that based on implied volatility index.

Table 5
Descriptive statistics of all the variables.
△WTI △USDCNY △SHCI

Mean 1021.793 0.000 0.000

Median 1014 0.000 0.000
Maximum 2047 0.018 0.064
Minimum 1 − 0.016 − 0.089
Std. dev. 589.678 0.002 0.014
Skewness 0.003 0.533 − 0.897
Kurtosis 1.813 16.682 9.635
Jarque-Bera 121.266*** 16211.178*** 4066.427***
ADF − 13.290*** − 13.421*** − 8.390***
PP − 46.657*** − 44.093*** − 44.037***
KPSS 0.730* 0.596* 0.114***

Note: “***” denotes significance at the 1% level.

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Table 6
Estimation results of implied volatility indices’ changes in the TVP-VAR model.
Parameter Mean Std. dev. 95%L 95%U Geweke Inef.
∑
( β)1 0.2055 0.2788 0.0170 1.0166 0.000 331.18
∑
( β)2 0.0187 0.0033 0.0148 0.0286 0.000 194.92
∑
( α)1 6.4352 44.0618 0.0145 30.1235 0.000 6.83
∑
( α)2 0.0179 0.0049 0.0134 0.0320 0.000 320.05
∑
( h)1 0.5588 0.1208 0.3830 0.8408 0.000 255.66
∑
( h)2 5.3979 1.4016 1.6891 6.7522 0.000 346.64

Mean: posterior mean; Std. dev.: standard deviation; 95%L: 95% lower credible interval limit; 95% upper credible interval limit; Geweke: Geweke
convergence diagnostics statistic; and, Inef.: inefficiency.

Fig. 11. Impulse responses of WTI changes to USDCNY changes.

Fig. 12. Impulse responses of WTI changes to SHCI changes.

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M. Tian et al. North American Journal of Economics and Finance xxx (xxxx) xxx

Fig. 13. Impulse responses of USDCNY changes to SHCI changes.

Table 7
Estimation results of implied volatility indices’ changes in the TVP-VAR model.
Parameter Mean Std. dev. 95%L 95%U Geweke Inef.
∑
( β)1 0.0196 0.0019 0.0165 0.0239 0.438 66.25
∑
( β)2 0.0200 0.0019 0.0168 0.0243 0.668 55.33
∑
( α)1 0.0428 0.0073 0.0316 0.0576 0.830 207.27
∑
( α)2 0.0292 0.0031 0.0235 0.0352 0.000 91.60
∑
( h)1 0.3557 0.0237 0.3128 0.4043 0.920 53.42
∑
( h)2 0.3750 0.0245 0.3301 0.4260 0.499 22.92

Mean: posterior mean; Std. dev.: standard deviation; 95%L: 95% lower credible interval limit; 95% upper credible interval limit; Geweke: Geweke
convergence diagnostics statistic; and, Inef.: inefficiency.

Fig. 14. Impulse responses of OVX changes to USDCNYV1M changes.

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M. Tian et al. North American Journal of Economics and Finance xxx (xxxx) xxx

6. The robustness test

To test the validity of our results, we test whether changes in the order of △USDCNYV1M and △VXFXI in the VAR model will
affect the empirical results. Considering that the OVX changes is the main factor affecting other market changes, we determine the
order of variables in TVP-VAR mode is △OVX, △VXFXI, △USDCNYV1M. According to the SBIC criterion, we choose the optimum
number of lags in the TVP-VAR model to 1. In the interests of saving space, only a number of the main results are presented.
Table 7 shows the estimation results of the variable after interchange order in the TVP-VAR model. Figs. 14–19 shows the time-
varying impulse results and suggests that the findings are similar to the results shown in Figs. 5–10. Although there are some dif­
ferences between Figs. 19 and 10, the order of influence effect results of different time points in the two pictures is consistent. The
Chinese stock market is mainly driven by the fluctuations in the oil market. By contrast, the fluctuation in the stock market is less
affected by the USD/RMB exchange rate fluctuations. This confirms our findings that the uncertainty information transmission based
on implied volatility index changes is faster in the short term (Melike & Mesut, 2019; Mohsen & Sujata, 2019).

7. Conclusions

In this study, we used the changes in three implied volatility indices to investigate the relationships among the oil market, the
Chinese stock market, and the USD/RMB exchange rate. The implied volatility indices’ changes are considered as a better measure of
uncertainty in the financial markets and of investors’ panic. However, few studies have focused on using implied volatility indices to
investigate the uncertainty transmission among oil market volatility, Chinese stock market volatility, and USD/RMB exchange rate
volatility, when an unexpected financial incident happens. Moreover, most of the research has paid more attention to using historical
price data to investigate the relationships among the oil market, the exchange rate market, and the Chinese stock market in China.
Therefore, little is known about how cross-market implied volatility connections. To address this research gap, our study employed a
TVP-VAR model to examine the cross-market impacts of (1) the OVX changes on the USDCNYV1M changes, (2) the OVX changes on the
VXFXI changes and (3) the USDCNYV1M changes on the VXFXI changes, when an important economic or policy event occurs.
This study used daily data from March 16, 2011, to September 9, 2019, to show that the uncertainty transmission impact of implied
volatility indices’ changes is significantly positive across markets but sometimes becomes negative in the short term. With more in­
formation arriving in subsequent periods, the effects revert to the mean. The results indicated that the uncertainty in the oil market has
a stronger positive effect on the uncertainty in the bilateral exchange rate market during the long-term oil crisis and the exchange rate
formation system reform. Meanwhile, the uncertainty in the oil market has a more significant impact on the uncertainty in the Chinese
stock market during the bearish period. Furthermore, USDCNYV1M changes influenced the impact of OVX changes on VXFXI changes.
These results suggest that cross-market uncertainty transmission through the implied volatility indices further decreased investors’
confidence as the economy continues to deteriorate. Furthermore, the increase in the uncertainty in the financial markets accelerated
the transfer of international financial risk.
These findings have important policy implications. The uncertainty transmission through the implied volatility indices’ changes
can provide more information about cross-market financial risks. Investors should take advantage of this information to transfer funds
or devise asset allocation strategies for a combination of investments that reduce risk, especially during bear markets. During periods of

Fig. 15. Impulse responses of OVX changes to VXFXI changes.

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M. Tian et al. North American Journal of Economics and Finance xxx (xxxx) xxx

Fig. 16. Impulse responses of USDCNYV1M changes to VXFXI changes.

Fig. 17. The different responses of OVX changes to USDCNYV1M changes.

exchange rate fluctuations, we suggest investors to buy put options with larger strike price for hedging exchange rate risk. Meanwhile,
the USD/RMB currency pair is more sensitive to fluctuation in oil prices after an exchange rate formation system reform. As regards
policymakers, they need to enhance the risk management of the pressures of exchange rate marketisation from oil price shocks and
maintain relative stability of the exchange rates of major reserve currencies. Additionally, policymakers should develop a robust
strategy to guide investor trading to avoid the influence of non-rational psychological factors during times of economic uncertainty.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to
influence the work reported in this paper.

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M. Tian et al. North American Journal of Economics and Finance xxx (xxxx) xxx

Fig. 18. The different responses of OVX changes to VXFXI changes.

Fig. 19. The different responses of USDCNYV1M changes to VXFXI changes.

Acknowledgement

We gratefully acknowledge financial support from National Natural Science Foundation of China (Nos. 71873146, 71873147).

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