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The relationship between energy and equity markets: Evidence from volatility impulse response functions

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  • Olson, Eric
  • J. Vivian, Andrew
  • Wohar, Mark E.

Abstract

This paper examines the relationship between the energy and equity markets by estimating volatility impulse response functions from a multivariate BEKK model of the Goldman Sach's Energy Index and the S&P 500; in addition, we also calculate the time varying conditional correlations and time varying dynamic hedge ratios. From volatility impulse response functions, we find that low S&P 500 returns cause substantial increases in the volatility of the energy index; however, we find only a weak response from S&P 500 volatility to energy price shocks. Moreover, our dynamic hedge ratio analysis suggests that the energy index is generally a poor hedging instrument.

Suggested Citation

  • Olson, Eric & J. Vivian, Andrew & Wohar, Mark E., 2014. "The relationship between energy and equity markets: Evidence from volatility impulse response functions," Energy Economics, Elsevier, vol. 43(C), pages 297-305.
  • Handle: RePEc:eee:eneeco:v:43:y:2014:i:c:p:297-305
    DOI: 10.1016/j.eneco.2014.01.009
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    More about this item

    Keywords

    Volatility impulse response functions; Dynamic hedge ratios; Volatility spillovers; Conditional correlation; Commodity market; Equity index;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General

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