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Abstract

This paper investigates the conditional correlations and volatility spillovers between 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 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.

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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1004.pdf
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Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 10/04.

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Length: 44 pages
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:cbt:econwp:10/04

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Keywords: Multivariate GARCH; volatility spillovers; conditional correlations; crude oil prices; spot; forward and futures prices; stock indices;

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Find related papers by JEL classification:

• C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
• C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
• G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
• G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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Cited by:

1. Michael McAleer & Shawkat Hammoudeh, 2012. "Risk Management and Financial Derivatives:An Overview," KIER Working Papers 816, Kyoto University, Institute of Economic Research.
   
   • Hammoudeh, S.M. & McAleer, M.J., 2012. "Risk Management and Financial Derivatives: An Overview," Econometric Institute Report EI 2012-14, Erasmus University Rotterdam, Econometric Institute.
   • Shawkat Hammoudeh & Michael McAleer, 2012. "Risk Management and Financial Derivatives: An Overview," Documentos del Instituto Complutense de Análisis Económico 2012-08, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
   • Shawkat Hammoudeh & Michael McAleer, 2012. "Risk Management and Financial Derivatives: An Overview," Working Papers in Economics 12/10, University of Canterbury, Department of Economics and Finance.
2. Onour, Ibrahim, 2010. "Crude Oil Prices and Stock Markets in Major Oil Exporting Countries: Evidence on Decoupling Feature," MPRA Paper 23334, University Library of Munich, Germany.
3. Filis, George & Degiannakis, Stavros & Floros, Christos, 2011. "Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 152-164, June.

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