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Dynamic connectedness between crude oil and equity markets: What about the effects of firm's solvency and profitability positions?

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  • Balli, Faruk
  • O Balli, Hatice
  • Nguyen, Thi Thu Ha

Abstract

The paper aims to explore the presence of connectedness between oil price changes and stock returns of oil & gas sector. The analysis, adopting the connectedness approach developed by and the frequency connectedness developed by demonstrates a high level of connectedness, especially during the extreme economic meltdown. The short-term (1–5 days) level of total connectedness is substantially higher than the medium-term (5–30 days) and long-term levels (30–262 days). In addition, when examining the impact of the sectors' financial characteristics on the extent of the connectedness, we found that sectors with greater solvency position (lower debt to asset ratio and higher interest coverage) are less connected with the oil price changes. The impact of sector's solvency position on connectedness (between stock return and oil prices) is even more obvious for financially more open markets. Also, change in oil prices have a less impact on the returns of sectors with higher profitability ratios. The paper, therefore, brings several implications to both policy makers and investors.

Suggested Citation

  • Balli, Faruk & O Balli, Hatice & Nguyen, Thi Thu Ha, 2023. "Dynamic connectedness between crude oil and equity markets: What about the effects of firm's solvency and profitability positions?," Journal of Commodity Markets, Elsevier, vol. 31(C).
    • Handle: RePEc:eee:jocoma:v:31:y:2023:i:c:s2405851323000387
    DOI: 10.1016/j.jcomm.2023.100348
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    More about this item

    Keywords

    Connectedness; Frequency connectedness; Oil & gas sector; Profitability; Solvency ratio;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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