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Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns

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Author Info

  • Chia-Lin Chang

    (Department of Applied Economics, National Chung Hsing University)

  • Michael McAleer

    (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University)

  • Roengchai Tansuchat

    (Faculty of Economics, Maejo University)

Abstract

This paper investigates the conditional correlations and volatility spillovers between the crude oil and financial markets, based on 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 stock 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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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 715.

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Length: 43pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:kyo:wpaper:715

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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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References

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Cited by:
  1. Lee, Chien-Chiang & Chen, Mei-Ping & Chang, Chi-Hung, 2013. "Dynamic relationships between industry returns and stock market returns," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 119-144.
  2. Anissa Chaibi & Mathieu Gomes, 2013. "Volatility Spillovers Between Oil Prices and Stock Returns: A Focus on Frontier Markets," Working Papers 2013-034, Department of Research, Ipag Business School.
  3. Hammoudeh, S.M. & McAleer, M.J., 2012. "Risk Management and Financial Derivatives: An Overview," Econometric Institute Research Papers EI 2012-14, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  4. 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.
  5. Chia-Lin Chang & Hui-Kuang Hsu & Michael McAleer, 2013. "The Impact of China on Stock Returns and Volatility in the Taiwan Tourism Industry," Working Papers in Economics 13/27, University of Canterbury, Department of Economics and Finance.
  6. repec:ipg:wpaper:34 is not listed on IDEAS
  7. Souček, Michael & Todorova, Neda, 2013. "Realized volatility transmission between crude oil and equity futures markets: A multivariate HAR approach," Energy Economics, Elsevier, vol. 40(C), pages 586-597.
  8. Gustavo A. Marrero & Luis A. Puch & Francisco J. Ramos-Real, 2013. "Mean-variance portfolio methods for energy policy risk management," Documentos de Trabajo del ICAE 2013-41, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  9. Yang, Hsin-Feng & Liu, Chih-Liang & Chou, Ray Yeutien, 2014. "Interest rate risk propagation: Evidence from the credit crunch," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 242-264.
  10. Souček, Michael, 2013. "Crude oil, equity and gold futures open interest co-movements," Energy Economics, Elsevier, vol. 40(C), pages 306-315.
  11. Broadstock, David C. & Cao, Hong & Zhang, Dayong, 2012. "Oil shocks and their impact on energy related stocks in China," Energy Economics, Elsevier, vol. 34(6), pages 1888-1895.
  12. Degiannakis, Stavros & Filis, George & Floros, Christos, 2013. "Oil and stock returns: Evidence from European industrial sector indices in a time-varying environment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 175-191.

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