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On the impacts of oil price fluctuations on European equity markets: Volatility spillover and hedging effectiveness

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  • Arouri, Mohamed El Hedi
  • Jouini, Jamel
  • Nguyen, Duc Khuong

Abstract

The objective of this paper is to investigate the volatility spillovers between oil and stock markets in Europe. As not all industries are expected to be equally affected by oil price changes, we conduct our study at both the aggregate as well as sector levels. Empirically, we make use of a recently developed VAR–GARCH approach which allows for transmissions in volatilities. In addition, we analyze the optimal weights and hedge ratios for oil–stock portfolio holdings based on our results. On the whole, our findings show significant volatility spillovers between oil price and sector stock returns, and suggest that a better understanding of those links is crucial for portfolio management in the presence of oil price risk.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:2:p:611-617
    DOI: 10.1016/j.eneco.2011.08.009
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    More about this item

    Keywords

    Sector returns; Oil prices; Hedge ratios; VAR–GARCH models;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F3 - International Economics - - International Finance
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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