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Volatility spillovers between oil and financial markets during economic and financial crises: A dynamic approach

Author

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  • Javier Sánchez García

    (University of Almería
    Mediterranean Research Center of Economics and Sustainable Development (CIMEDES))

  • Salvador Cruz Rambaud

    (University of Almería
    Mediterranean Research Center of Economics and Sustainable Development (CIMEDES))

Abstract

Volatility in international oil markets is a recurrent phenomenon which causes spillovers on financial markets. However, a bidirectional comparison between the dynamic behavior of economic and financial crises has not been documented yet. This paper addresses this research question by employing a combined GARCH-VAR-Spillover Index methodology to measure the volatility of the WTI and the Brent in order to analyze its relationship with the SP500, NASDAQ, DAX and the IBEX for a sample corresponding to the period [2000:01, 2021:04]. Specifically, this paper compares the dynamic behavior of spillovers during the 2007-2009 financial crisis (taken as the financial crisis) and the COVID-19 pandemic (taken as the economic crisis). It has been found that there exists statistically significant net volatility shocks and spillovers from oil to stocks markets in the majority of cases and periods. These spillovers are bidirectional, and the net relationship is reversed depending on the market and the time period. The dynamic behavior of such spillovers depends on the region, being the USA more reactive to the source of the crisis than Europe. In particular, in the USA when the crisis is originated by financial shocks, financial markets are net transmitters of volatility to oil markets. When the source of the shock is economic, oil markets are net transmitters of volatility to stocks markets. This is not the case for Europe, where financial markets seem to be either transmitters or receivers of volatility no matter the source of the shock. In general, our study offers new evidence to understand macro-financial linkages.

Suggested Citation

  • Javier Sánchez García & Salvador Cruz Rambaud, 2023. "Volatility spillovers between oil and financial markets during economic and financial crises: A dynamic approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(4), pages 1018-1040, December.
    • Handle: RePEc:spr:jecfin:v:47:y:2023:i:4:d:10.1007_s12197-023-09634-x
    DOI: 10.1007/s12197-023-09634-x
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    Keywords

    Price volatility; International oil markets; COVID-19 pandemic; GARCH models; Forecasting and simulation;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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