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Modelling volatility spillovers between prices of petroleum and stock sector indices: A multivariate GARCH comparison

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  • Miramir Bagirov

  • Cesario Mateus

Abstract

This study compares four multivariate GARCH approaches in modelling bilateral return and volatility spillovers between petroleum prices and self-constructed stock sector indices of net petroleum exporters (Canada and Saudi Arabia) and net petroleum importers (the United States and China). The estimates are subsequently used to quantify optimal portfolio weights and hedge ratios and to evaluate the effectiveness of the resulting hedging strategies. The outputs point to the presence of heterogeneous volatility interdependencies, which are more evident for Canada and the United States. The optimal weight of petroleum is greater in portfolios comprising stock sector indices of Saudi Arabia and China, which also provide lower hedging costs. Time-varying conditional correlations, portfolio weights, and hedge ratios exhibit considerable variations, particularly during turbulent periods. Finally, the hedging strategies generated from the VAR-DCC-GARCH specification result in the greatest reduction, although not substantial, of risks for portfolios involving stock sector indices of all countries.

Suggested Citation

  • Miramir Bagirov & Cesario Mateus, 2025. "Modelling volatility spillovers between prices of petroleum and stock sector indices: A multivariate GARCH comparison," Modern Finance, Modern Finance Institute, vol. 3(3), pages 66-111.
    • Handle: RePEc:bdy:modfin:v:3:y:2025:i:3:p:66-111:id:318
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    1. Malik, Farooq & Ewing, Bradley T., 2009. "Volatility transmission between oil prices and equity sector returns," International Review of Financial Analysis, Elsevier, vol. 18(3), pages 95-100, June.
    2. Christiane Baumeister & Lutz Kilian, 2016. "Understanding the Decline in the Price of Oil since June 2014," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(1), pages 131-158.
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