Volatility spillovers between oil prices and stock sector returns: Implications for portfolio management
AbstractIn this article we take a recent generalized VAR-GARCH approach to examine the extent of volatility transmission between oil and stock markets in Europe and the United States at the sector-level. The empirical model is advantageous in that it typically allows simultaneous shock transmission in the conditional returns and volatilities. Insofar as volatility transmission across oil and stock sector markets is a crucial element for portfolio designs and risk management, we also analyze the optimal weights and hedge ratios for oil-stock portfolio holdings with respect to the results. Our findings point to the existence of significant volatility spillover between oil and sector stock returns. However, the spillover is usually unidirectional from oil markets to stock markets in Europe, but bidirectional in the United States. Our back-testing procedures, finally, suggest that taking the cross-market volatility spillovers estimated from the VAR-GARCH models often leads to diversification benefits and hedging effectiveness better than those of commonly used multivariate volatility models such as the CCC-GARCH of Bollerslev (1990), the diagonal BEKK-GARCH of Engle and Kroner (1995) and the DCC-GARCH of Engle (2002).
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 30 (2011)
Issue (Month): 7 ()
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Web page: http://www.elsevier.com/locate/inca/30443
Sector returns; Oil prices; Diversification and hedging effectiveness; VAR-GARCH models;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- F3 - International Economics - - International Finance
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
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