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Dynamic relations between oil and stock markets: Volatility spillovers, networks and causality

Author

Listed:
  • Jose E. Gomez-Gonzalez
  • Jorge Hirs-Garzón
  • Sebastián Sanín-Restrepo

Abstract

We study the relation between oil and stock market returns for a set of seven countries that are important participants in commodity markets. Observed oil prices are decomposed into a supply related factor, a demand related factor and a risk factor. Total and directional spillover indicators are computed using forecast error variance decomposition from vector autoregressions, and their dynamic nature is explored. Studying time-varying spillovers between commodity and traditional financial markets is crucial for the design of effective portfolio composition and risk diversification strategies in global financial markets. Our findings suggest that oil markets are net volatility receptors. While some recent studies suggest that results may depend on whether supply or demand factors are considered, this study finds major stock markets are net volatility transmitters to oil markets. Transmission intensities and net positions present, however, considerable time variation being substantially larger in moments of financial distress with respect to normal times. Furthermore, results from dynamic predictive causality tests show the existence of bidirectional relations, which are stronger from stock to oil markets. Our findings provide empirical evidence supporting the oil markets financialization hypothesis.

Suggested Citation

  • Jose E. Gomez-Gonzalez & Jorge Hirs-Garzón & Sebastián Sanín-Restrepo, 2021. "Dynamic relations between oil and stock markets: Volatility spillovers, networks and causality," International Economics, CEPII research center, issue 165, pages 37-50.
    • Handle: RePEc:cii:cepiie:2021-q1-165-4
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    Cited by:

    1. Jiang, Yonghong & Wang, Jieru & Lie, Jiayi & Mo, Bin, 2021. "Dynamic dependence nexus and causality of the renewable energy stock markets on the fossil energy markets," Energy, Elsevier, vol. 233(C).
    2. Yimin Wu & Rosmanjawati Abdul Rahman & Qiuju Yu, 2025. "Can the price fluctuations of Shanghai crude oil futures affect Asian financial markets? Evidence from the time and frequency dynamics analysis of spillover connectedness," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 24(2), pages 241-269, May.
    3. Ghaemi Asl, Mahdi & Adekoya, Oluwasegun Babatunde & Rashidi, Muhammad Mahdi & Ghasemi Doudkanlou, Mohammad & Dolatabadi, Ali, 2022. "Forecast of Bayesian-based dynamic connectedness between oil market and Islamic stock indices of Islamic oil-exporting countries: Application of the cascade-forward backpropagation network," Resources Policy, Elsevier, vol. 77(C).
    4. Raheem, Ibrahim D., 2022. "Different strokes for different folks: The case of oil shocks and emerging equity markets," Energy Economics, Elsevier, vol. 108(C).
    5. Ansaram, Karishma & Petitjean, Mikael, 2024. "A global perspective on the nexus between energy and stock markets in light of the rise of renewable energy," Energy Economics, Elsevier, vol. 131(C).
    6. Wang, Gang-Jin & Xiong, Lu & Zhu, You & Xie, Chi & Foglia, Matteo, 2022. "Multilayer network analysis of investor sentiment and stock returns," Research in International Business and Finance, Elsevier, vol. 62(C).
    7. Mesut Doğan & Sutbayeva Raikhan & Nurbossynova Zhanar & Bodaukhan Gulbagda, 2023. "Analysis of Dynamic Connectedness Relationships among Clean Energy, Carbon Emission Allowance, and BIST Indexes," Sustainability, MDPI, vol. 15(7), pages 1-13, March.
    8. Sukhmani Kaur & Shalini Aggarwal & Vikas Arora, 2025. "Co Movement of Stock Market of BRICS with G7 Stock Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 32(2), pages 327-356, June.
    9. Abid, Ilyes & Guesmi, Khaled & Goutte, Stéphane & Urom, Christian & Chevallier, Julien, 2019. "Commodities risk premia and regional integration in gas-exporting countries," Energy Economics, Elsevier, vol. 80(C), pages 267-276.
    10. Walid Chkili, 2022. "The links between gold, oil prices and Islamic stock markets in a regime switching environment," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 12(1), pages 169-186, March.
    11. Mensi, Walid & Al-Yahyaee, Khamis Hamed & Vo, Xuan Vinh & Kang, Sang Hoon, 2024. "COVID-19 and time-frequency spillovers between oil and sectoral stocks and portfolio implications: Evidence from China and US economies," International Economics, Elsevier, vol. 180(C).
    12. Al-Fayoumi, Nedal & Bouri, Elie & Abuzayed, Bana, 2023. "Decomposed oil price shocks and GCC stock market sector returns and volatility," Energy Economics, Elsevier, vol. 126(C).
    13. Raheem, Ibrahim D. & Akinkugbe, Oluyele & Vo, Xuan Vinh, 2025. "Oil shocks greasing the wheels of Islamic stocks: An explorative forecasting analysis," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 546-557.

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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