IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v34y2012i1p248-255.html
   My bibliography  Save this article

Correlations and volatility spillovers between oil prices and the stock prices of clean energy and technology companies

Author

Listed:
  • Sadorsky, Perry

Abstract

In this paper, multivariate GARCH models are used to model conditional correlations and to analyze the volatility spillovers between oil prices and the stock prices of clean energy companies and technology companies. Four different multivariate GARCH models (BEKK, diagonal, constant conditional correlation, and dynamic conditional correlation) are compared and contrasted. The dynamic conditional correlation model is found to fit the data the best and generates results showing that the stock prices of clean energy companies correlate more highly with technology stock prices than with oil prices. On average, a $1 long position in clean energy companies can be hedged for 20cents with a short position in the crude oil futures market.

Suggested Citation

  • Sadorsky, Perry, 2012. "Correlations and volatility spillovers between oil prices and the stock prices of clean energy and technology companies," Energy Economics, Elsevier, vol. 34(1), pages 248-255.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:1:p:248-255
    DOI: 10.1016/j.eneco.2011.03.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988311000740
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2011.03.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chang, C-L. & McAleer, M.J. & Tansuchat, R., 2010. "Analyzing and Forecasting Volatility Spillovers and Asymmetries in Major Crude Oil Spot, Forward and Futures Markets," Econometric Institute Research Papers EI 2010-14, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    2. Ling, Shiqing & McAleer, Michael, 2003. "Asymptotic Theory For A Vector Arma-Garch Model," Econometric Theory, Cambridge University Press, vol. 19(2), pages 280-310, April.
    3. Hammoudeh, Shawkat M. & Yuan, Yuan & McAleer, Michael & Thompson, Mark A., 2010. "Precious metals-exchange rate volatility transmissions and hedging strategies," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 633-647, October.
    4. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2010. "Analyzing and forecasting volatility spillovers, asymmetries and hedging in major oil markets," Energy Economics, Elsevier, vol. 32(6), pages 1445-1455, November.
    5. Heung-Joo Cha & Thadavillil Jithendranathan, 2009. "Time-varying correlations and optimal allocation in emerging market equities for the US investors," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 172-187.
    6. Karolyi, G Andrew & Stulz, Rene M, 1996. "Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Journal of Finance, American Finance Association, vol. 51(3), pages 951-986, July.
    7. Cifarelli, Giulio & Paladino, Giovanna, 2010. "Oil price dynamics and speculation: A multivariate financial approach," Energy Economics, Elsevier, vol. 32(2), pages 363-372, March.
    8. Elder, John & Serletis, Apostolos, 2009. "Oil price uncertainty in Canada," Energy Economics, Elsevier, vol. 31(6), pages 852-856, November.
    9. Henriques, Irene & Sadorsky, Perry, 2008. "Oil prices and the stock prices of alternative energy companies," Energy Economics, Elsevier, vol. 30(3), pages 998-1010, May.
    10. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 507-538.
    11. Weyant, John P., 2011. "Accelerating the development and diffusion of new energy technologies: Beyond the "valley of death"," Energy Economics, Elsevier, vol. 33(4), pages 674-682, July.
    12. Koutmos, Gregory & Booth, G Geoffrey, 1995. "Asymmetric volatility transmission in international stock markets," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 747-762, December.
    13. Booth, G. Geoffrey & Martikainen, Teppo & Tse, Yiuman, 1997. "Price and volatility spillovers in Scandinavian stock markets," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 811-823, June.
    14. Higgs, Helen, 2009. "Modelling price and volatility inter-relationships in the Australian wholesale spot electricity markets," Energy Economics, Elsevier, vol. 31(5), pages 748-756, September.
    15. Hammoudeh, Shawkat M. & Yuan, Yuan & McAleer, Michael, 2009. "Shock and volatility spillovers among equity sectors of the Gulf Arab stock markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 829-842, August.
    16. Karolyi, G Andrew, 1995. "A Multivariate GARCH Model of International Transmissions of Stock Returns and Volatility: The Case of the United States and Canada," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 11-25, January.
    17. Bürer, Mary Jean & Wüstenhagen, Rolf, 2009. "Which renewable energy policy is a venture capitalist's best friend? Empirical evidence from a survey of international cleantech investors," Energy Policy, Elsevier, vol. 37(12), pages 4997-5006, December.
    18. Luc Bauwens & Sébastien Laurent & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109, January.
    19. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(4), pages 535-551, December.
    20. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    21. Worthington, Andrew & Kay-Spratley, Adam & Higgs, Helen, 2005. "Transmission of prices and price volatility in Australian electricity spot markets: a multivariate GARCH analysis," Energy Economics, Elsevier, vol. 27(2), pages 337-350, March.
    22. Helen Higgs, 2009. "Modelling price and volatility inter-relationships in the Australian wholesale spot electricity markets," Discussion Papers in Economics economics:200904, Griffith University, Department of Accounting, Finance and Economics.
    23. Malik, Farooq & Hammoudeh, Shawkat, 2007. "Shock and volatility transmission in the oil, US and Gulf equity markets," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 357-368.
    24. Chang, Chiao-Yi & Lai, Jing-Yi & Chuang, I-Yuan, 2010. "Futures hedging effectiveness under the segmentation of bear/bull energy markets," Energy Economics, Elsevier, vol. 32(2), pages 442-449, March.
    25. Sadorsky, Perry, 2006. "Modeling and forecasting petroleum futures volatility," Energy Economics, Elsevier, vol. 28(4), pages 467-488, July.
    26. Ewing, Bradley T. & Malik, Farooq & Ozfidan, Ozkan, 2002. "Volatility transmission in the oil and natural gas markets," Energy Economics, Elsevier, vol. 24(6), pages 525-538, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kumar, Satish & Pradhan, Ashis Kumar & Tiwari, Aviral Kumar & Kang, Sang Hoon, 2019. "Correlations and volatility spillovers between oil, natural gas, and stock prices in India," Resources Policy, Elsevier, vol. 62(C), pages 282-291.
    2. Jin Guo & Tetsuji Tanaka, 2019. "Determinants of international price volatility transmissions: the role of self-sufficiency rates in wheat-importing countries," Palgrave Communications, Palgrave Macmillan, vol. 5(1), pages 1-13, December.
    3. Wang, Yudong & Wu, Chongfeng, 2012. "Forecasting energy market volatility using GARCH models: Can multivariate models beat univariate models?," Energy Economics, Elsevier, vol. 34(6), pages 2167-2181.
    4. Lin, Boqiang & Wesseh, Presley K. & Appiah, Michael Owusu, 2014. "Oil price fluctuation, volatility spillover and the Ghanaian equity market: Implication for portfolio management and hedging effectiveness," Energy Economics, Elsevier, vol. 42(C), pages 172-182.
    5. Ngene, Geoffrey & Post, Jordin A. & Mungai, Ann N., 2018. "Volatility and shock interactions and risk management implications: Evidence from the U.S. and frontier markets," Emerging Markets Review, Elsevier, vol. 37(C), pages 181-198.
    6. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2008. "Dynamic Stock Market Interactions between the Canadian, Mexican, and the United States Markets: The NAFTA Experience," Working papers 2008-49, University of Connecticut, Department of Economics.
    7. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2011. "Crude oil hedging strategies using dynamic multivariate GARCH," Energy Economics, Elsevier, vol. 33(5), pages 912-923, September.
    8. Usman M. Umer, Metin Coskun, Kasim Kiraci, 2018. "Time-varying Return and Volatility Spillover among EAGLEs Stock Markets: A Multivariate GARCH Analysis," Journal of Finance and Economics Research, Geist Science, Iqra University, Faculty of Business Administration, vol. 3(1), pages 23-42, March.
    9. Chen, Yufeng & Zheng, Biao & Qu, Fang, 2020. "Modeling the nexus of crude oil, new energy and rare earth in China: An asymmetric VAR-BEKK (DCC)-GARCH approach," Resources Policy, Elsevier, vol. 65(C).
    10. Ziadat, Salem Adel & Herbst, Patrick & McMillan, David G., 2020. "Inter- and intra-regional stock market relations for the GCC bloc," Research in International Business and Finance, Elsevier, vol. 54(C).
    11. Arouri, Mohamed El Hedi & Jouini, Jamel & Nguyen, Duc Khuong, 2012. "On the impacts of oil price fluctuations on European equity markets: Volatility spillover and hedging effectiveness," Energy Economics, Elsevier, vol. 34(2), pages 611-617.
    12. Basher, Syed Abul & Sadorsky, Perry, 2016. "Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH," Energy Economics, Elsevier, vol. 54(C), pages 235-247.
    13. Syriopoulos, Theodore & Makram, Beljid & Boubaker, Adel, 2015. "Stock market volatility spillovers and portfolio hedging: BRICS and the financial crisis," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 7-18.
    14. Chkili, Walid, 2016. "Dynamic correlations and hedging effectiveness between gold and stock markets: Evidence for BRICS countries," Research in International Business and Finance, Elsevier, vol. 38(C), pages 22-34.
    15. Antonakakis, Nikolaos & Cunado, Juncal & Filis, George & Gabauer, David & Perez de Gracia, Fernando, 2018. "Oil volatility, oil and gas firms and portfolio diversification," Energy Economics, Elsevier, vol. 70(C), pages 499-515.
    16. Do, Hung Xuan & Nepal, Rabindra & Jamasb, Tooraj, 2020. "Electricity market integration, decarbonisation and security of supply: Dynamic volatility connectedness in the Irish and Great Britain markets," Energy Economics, Elsevier, vol. 92(C).
    17. El Hedi Arouri, Mohamed & Jouini, Jamel & Nguyen, Duc Khuong, 2011. "Volatility spillovers between oil prices and stock sector returns: Implications for portfolio management," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1387-1405.
    18. Baele, Lieven, 2005. "Volatility Spillover Effects in European Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(2), pages 373-401, June.
    19. Jin, Xiaoye & An, Ximeng, 2016. "Global financial crisis and emerging stock market contagion: A volatility impulse response function approach," Research in International Business and Finance, Elsevier, vol. 36(C), pages 179-195.
    20. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2013. "Conditional correlations and volatility spillovers between crude oil and stock index returns," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 116-138.

    More about this item

    Keywords

    Renewable energy; Multivariate GARCH; Volatility; Oil prices;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:34:y:2012:i:1:p:248-255. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.