Risk transmission between oil price shocks and major equity indices across bull and bear markets over various time horizons

Interrelations among oil shocks and equity markets at extreme and median quantiles are examined by means of the cross-spectral quantile technique and quantile vector auto-regression analysis. It is shown that the developed markets (oil shocks and emerging markets) are consistent net transmitters (receivers) across all quantiles, whereas the intensity of the interlinkages depends upon bearish, bullish, or side trending market states and, also, upon short, intermedium-, or long-run investment perspectives. Oil shock connectedness with stocks is strong at extreme market states but diminishes for medium quantiles corresponding to normal market conditions. However, our pairwise connectedness analysis reveals that the network topology of the oil-stock connectedness is resilient to the changes in market conditions, implying that the hedging strategies, designed for normal markets, are supposed to be workable during the boom and bust phases too. Moreover, the results show that spillovers vary substantially along the time and highlight the COVID-19-triggered alteration in the diversification potential of international stocks. Our research provides guiding implications to investors, portfolio managers, and market regulators regarding identification of diversification opportunities and intensity of contagion in financial markets.