Complutense University Library

Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns

Chang, Chia-Lin and McAleer, Michael and Tansuchat, Roengchai (2011) Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns. [ Documentos de trabajo del Instituto Complutense de Análisis Económico; nº 34, 2011, ] (Unpublished)

[img]
Preview
PDF
Available under License Creative Commons Attribution Non-commercial.

1MB

Official URL: http://eprints.ucm.es/13819/

View download statistics for this eprint

==>>> Export to other formats

Abstract

This paper investigates the conditional correlations and volatility spillovers between the crude oil and financial markets, based on crude oil returns and stock index returns. Daily returns from 2 January 1998 to 4 November 2009 of the crude oil spot, forward and futures prices from the WTI and Brent markets, and the FTSE100, NYSE, Dow Jones and S&P500 stock index returns, are analysed using the CCC model of Bollerslev (1990), VARMA-GARCH model of Ling and McAleer (2003), VARMA-AGARCH model of McAleer, Hoti and Chan (2008), and DCC model of Engle (2002). Based on the CCC model, the estimates of conditional correlations for returns across markets are very low, and some are not statistically significant, which means the conditional shocks are correlated only in the same market and not across markets. However, the DCC estimates of the conditional correlations are always significant. This result makes it clear that the assumption of constant conditional correlations is not supported empirically. Surprisingly, the empirical results from the VARMA-GARCH and VARMA-AGARCH models provide little evidence of volatility spillovers between the crude oil and financial markets. The evidence of asymmetric effects of negative and positive shocks of equal magnitude on the conditional variances suggests that VARMA-AGARCH is superior to VARMA-GARCH and CCC. The estimation and analysis of the volatility and conditional correlations between crude oil returns and stock index returns can provide useful information for investors, oil traders and government agencies that are concerned with the crude oil and stock markets, especially regarding optimal hedging across the two markets.


Item Type:Working Paper or Technical Report
Additional Information:

JEL: C22, C32, G17, G32.
The authors are most grateful to a referee for helpful comments and suggestions. For financial support, the first author is most grateful to the National Science Council, Taiwan, the second author thanks the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science, and the third author acknowledges the Faculty of Economics, Maejo University, Thailand.

Uncontrolled Keywords:Multivariate GARCH, Volatility spillovers, Conditional correlations, Crude oil prices, Spot, Forward and futures prices, Stock indexes.
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de trabajo del Instituto Complutense de Análisis Económico
Volume:2011
Number:34
ID Code:13819
References:

Aloui, C. and R. Jammazi (2009), The effects of crude oil shocks on stock market shifts behavior: A regime switching approach, Energy Economics, 31, 789-799.

Basher, S.A. and P. Sardosky (2006), Oil price risk and emerging stock markets, Global Finance Journal, 17, 224-251.

Bauwens, L., S. Laurent and J. Rombouts (2006), Multivariate GARCH models: A survey, Journal of Applied Econometrics, 21, 79-109.

Bollerslev, T. (1990), Modelling the coherence in short-run nominal exchange rate: A multivariate generalized ARCH approach, Review of Economics and Statistics 72, 498-505.

Bollerslev, T. and J. Wooldridge (1992), Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances, Econometric Reviews, 11, 143-172.

Boyer, M. and D. Filion (2004), Common and fundamental factors in stock returns of Canadian oil and gas companies, Energy Economics, 29, 428-453.

Caporin, M. and M. McAleer (2009), Do we really need both BEKK and DCC? A tale of two covariance models. Available at SSRN: http://ssrn.com/abstract=1338190.

Caporin, M. and M. McAleer (2010), Do we really need both BEKK and DCC? A tale of two multivariate GARCH models. To appear in Journal of Economic Surveys. Available at SSRN: http://ssrn.com/abstract=1549167.

Chang, C.-L., M. McAleer and R. Tansuchat (2009), Volatility spillovers between returns on crude oil futures and oil company stocks. Available at http://ssrn.com/abstract=1406983.

Ciner, C. (2001), Energy shocks and financial markets: nonlinear linkages, Studies in Nonlinear Dynamics & Econometrics, 5(3), 203-212.

Cologni, A. and M. Manera (2008), Oil prices, inflation and interest rates in a structural cointegrated VAR model for the G-7 countries, Energy Economics, 38, 856–888.

Cong, R.-G., Y.-M. Wei, J.-L. Jiao and Y. Fan (2008), Relationships between oil price shocks and stock market: An empirical analysis from China, Energy Policy, 36, 3544-3553.

Cunado, J. and F. Perez de Garcia (2005), Oil prices, economic activity and inflation: Evidence for some Asian countries, Quarterly Review of Economics and Finance, 45(1), 65–83.

Driesprong, G., B. Jacobsen and B. Maat (2008), Striking oil: Another puzzle?, Journal of Financial Economics, 89, 307-327.

Engle, R. (2002), Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models, Journal of Business and Economic Statistics, 20, 339-350.

Faff, R.W. and T. Brailsford (1999), Oil price risk and the Australian stock market, Journal of Energy Finance and Development, 4, 69-87.

Glosten, L., R. Jagannathan and D. Runkle (1992), On the relation between the expected value and volatility of nominal excess return on stocks, Journal of Finance, 46, 1779-1801.

Hamilton, J.D. (1983), Oil and the macroeconomy since World War II, Journal of Political Economy, 88, 829-853.

Hamilton, J.D. and A.M. Herrera (2004), Oil shocks and aggregate macroeconomic behavior: the role of monetary policy, Journal of Money, Credit and Banking, 36 (2), 265-286.

Hammoudeh, S. and E. Aleisa (2002), Relationship between spot/futures price of crude oil and equity indices for oil-producing economies and oil-related industries, Arab Economic Journal, 11, 37-62.

Hammoudeh, S. and E. Aleisa (2004), Dynamic relationships among GCC stock markets and NYMEX oil futures, Contemporary Economics Policy, 22, 250-269.

Hammoudeh, S., S. Dibooglu and E. Aleisa (2004), Relationships among US oil prices and oil industry equity indices, International Review of Economics and Finance, 13(3), 427-453.

Hammoudeh, S. and H. Li (2005), Oil sensitivity and systematic risk in oil-sensitive stock indices, Journal of Economics and Business, 57, 1-21.

Henriques, I. and P. Sadorsky (2008), Oil prices and the stock prices of alternative energy companies, Energy Economics, 30, 998-1010.

Hooker, M. (2002), Are oil shocks inflationary? Asymmetric and nonlinear specification versus changes in regime, Journal of Money, Credit and Banking, 34(2), 540-561.

Huang, R.D., R.W. Masulis and H.R. Stoll (1996), Energy shocks and financial markets, Journal of Futures Markets, 16(1), 1-27.

Jiménez-Rodríguez, R. and M. Sánchez (2005), Oil price shocks and real GDP growth: Empirical evidence for some OECD countries, Applied Economics, 37(2), 201-228.

Jones, C.M. and G. Kaul (1996), Oil and the stock markets, Journal of Finance, 51(2), 463-491.

Kaneko, T. and B.-S. Lee (1995), Relative importance of economic factors in the U.S. and Japanese stock markets, Journal of the Japanese and International Economics, 9, 290-307.

Kilian, L. (2008), A comparison of the effects of exogenous oil supply shocks on output and inflation in the G7 countries, Journal of the European Economic Association, 6(1), 78–121.

Kilian, L. and C. Park (2009), The impact of oil price shocks on the U.S. stock market, International Economic Review, 50, 1267-1287.

Lee, K., S. Ni and R.A. Ratti (1995), Oil shocks and the macroeconomy: The role of price variability, Energy Journal, 16, 39-56.

Lee, B.R., K. Lee and R.A. Ratti (2001) Monetary policy, oil price shocks, and the Japanese economy, Japan and the World Economy, 13, 321–349.

Lee, K. and S. Ni (2002), On the dynamic effects of oil price shocks: a study using industry level data, Journal of Monetary Economics, 49, 823-852.

Li, W.-K., S. Ling and M. McAleer (2002), Recent theoretical results for time series models with GARCH errors, Journal of Economic Surveys, 16, 245-269. Reprinted in M. McAleer and L. Oxley (eds.), Contributions to Financial Econometrics: Theoretical and Practical Issues, Blackwell, Oxford, 2002, pp. 9-33.

Ling, S. and M. McAleer (2003), Asymptotic theory for a vector ARMA-GARCH model, Econometric Theory, 19, 278-308.

Maghyereh, A. (2004), Oil price shocks and emerging stock markets: A generalized VAR approach, International Journal of Applied Econometrics and Quantitative Studies, 1(2), 27-40.

Maghyereh, A. and A. Al-Kandari (2007), Oil prices and stock markets in GCC countries: New evidence from nonlinear cointegration analysis, Managerial Finance, 33(7), 449-460.

Malik, F. and S. Hammoudeh (2007), Shock and volatility transmission in the oil, US and Gulf equity markets, International Review of Economics and Finance, 16, 357-368.

McAleer, M. (2005), Automated inference and learning in modeling financial volatility, Econometric Theory, 21, 232-261.

McAleer, M., F. Chan, S. Hoti and O. Lieberman (2008), Generalized autoregressive conditional correlation, Econometric Theory, 24, 1554-1583.

McAleer, M., S. Hoti and F. Chan (2009), Structure and asymptotic theory for multivariate asymmetric conditional volatility, Econometric Reviews, 28, 422-440.

Mork, K. (1994), Business cycles and the oil market, Energy Journal, 15, 15-38.

Mork, K.A., O. Olsen and H.T. Mysen (1994), Macroeconomic responses to oil price increases and decreases in seven OECD countries, Energy Journal, 15: 19–35.

Nandha, M. and R. Faff (2007), Does oil move equity prices? A global view, Energy Economics, 30, 986-997.

Onour, I. (2007), Impact of oil price volatility on Gulf Cooperation Council stock markets’ return, Organization of the Petroleum Exporting Countries, 31, 171-189.

Papapetrou, E. (2001), Oil price shocks, stock markets, economic activity and employment in Greece, Energy Economics, 23, 511-532.

Park, J. and R.A. Ratti (2008), Oil price shocks and stock markets in the U.S. and 13 European countries, Energy Economics, 30, 2587-2608.

Sadorsky, P. (1999), Oil price shocks and stock market activity, Energy Economics, 21, 449-469.

Sadorsky, P. (2001), Risk factors in stock returns of Canadian oil and gas companies, Energy Economics, 23, 17-28.

Sadorsky, P. (2004), Stock markets and energy prices, Encyclopedia of Energy, Vol. 5, Elsevier, New York, 707−717.

Sadorsky, P. (2008), Assessing the impact of oil prices on firms of different sizes: Its tough being in the middle, Energy Policy, 36, 3854–3861.

Tse, Y.K. (2000), A test for constant correlations in a multivariate GARCH models, Journal of Econometrics, 98, 107-127.

Deposited On:10 Nov 2011 13:11
Last Modified:06 Feb 2014 09:54

Repository Staff Only: item control page