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Conditional Correlations in the Returns on Oil Companies Stock Prices and Their Determinants

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  • Matteo Manera

    (Department of Statistics, University of Milan-Bicocca and Fondazione Eni Enrico Mattei)

  • Massimo Giovannini

    (Department of Economics, Boston College)

  • Margherita Grasso

    (Fondazione Eni Enrico Mattei)

  • Alessandro Lanza

    (Eni S.p.A. and Fondazione Eni Enrico Mattei)

Abstract

The identification of the forces that drive stock returns and the dynamics of their associated volatilities is a major concern in empirical economics and finance. This analysis is particularly relevant for determining optimal hedging strategies based on whether shocks to the volatilities of returns of oil companies stock prices, relevant stock market indexes and oil spot and futures prices are high or low, and positively or negatively correlated. This paper investigates the correlations of volatilities in the stock price returns and their determinants for the most important integrated oil companies, namely Bp (BP), Chevron-Texaco (CVX), Eni (ENI), Exxon-Mobil (XOM), Royal Dutch (RD) and Total-Fina Elf (TFE). We measure the actual co-risk in stock returns and their determinants “within” and “between” the different oil companies, using multivariate cointegration techniques in modelling the conditional mean, as well as multivariate GARCH models for the conditional variances. We focus first on the determinants of the market value of each company using the cointegrated VAR/VECM methodology. Then we specifiy the conditional variances of VECM residuals with the Constant Conditional Correlation (CCC) multivariate GARCH model of Bollerslev (1990) and the Dynamic Conditional Correlation (DCC) multivariate GARCH model of Engle (2002). The “within” and “between” DCC indicate low to high/extreme interdependence between the volatilities of companies’ stock returns and the relevant stock market indexes or Brent oil prices.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2004.71.

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Date of creation: Apr 2004
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Handle: RePEc:fem:femwpa:2004.71

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Keywords: Constant conditional correlations; Dynamic conditional correlations; Multivariate GARCH models; Stock price indexes; Brent oil prices; Spot and futures prices; Multivariate cointegration; VECM;

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  1. Brooks, C. & Henry, O.T. & Persand, G., 1999. "Optimal Hedging and the Value of News," Department of Economics - Working Papers Series 717, The University of Melbourne.
  2. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  3. Donald Lien & Y. K. Tse & Albert Tsui, 2002. "Evaluating the hedging performance of the constant-correlation GARCH model," Applied Financial Economics, Taylor & Francis Journals, vol. 12(11), pages 791-798.
  4. McAleer, Michael & Chan, Felix & Hoti, Suhejla & Lieberman, Offer, 2008. "Generalized Autoregressive Conditional Correlation," Econometric Theory, Cambridge University Press, vol. 24(06), pages 1554-1583, December.
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  8. Alessandro Lanza & Matteo Manera & Margherita Grasso & Massimo Giovannini, 2003. "Long-run Models of Oil Stock Prices," Working Papers 2003.96, Fondazione Eni Enrico Mattei.
  9. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  10. Søren Johansen & Katarina Juselius, 1989. "The Full Information Maximum Likelihood Procedure for Inference on Cointegration - with Applications," Discussion Papers 89-11, University of Copenhagen. Department of Economics.
  11. Urbain, J-P., 1991. "On Weak Exogeneity in Error Correction Models," Papers 9103, Liege - Centre de Recherches Economiques et Demographiques.
  12. Elyasiani, Elyas & Mansur, Iqbal, 1998. "Sensitivity of the bank stock returns distribution to changes in the level and volatility of interest rate: A GARCH-M model," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 535-563, May.
  13. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
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Cited by:
  1. Kourouvakalis, Stylianos, 2008. "Méthodes numériques pour la valorisation d'options swings et autres problèmes sur les matières premières," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/116 edited by Geman, Hélyette, September.

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