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Analyzing volatility spillovers and hedging between oil and stock markets: Evidence from wavelet analysis

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  • Khalfaoui, R.
  • Boutahar, M.
  • Boubaker, H.

Abstract

This paper examines the linkage of crude oil market (WTI) and stock markets of the G-7 countries. We study the mean and volatility spillovers of oil and stock market prices over various time horizons. We propose a new approach incorporating both multivariate GARCH models and wavelet analysis: wavelet-based MGARCH approach. We combine a bivariate GARCH-BEKK model with wavelet multiresolution analysis in order to capture the multiscale features of mean and volatility spillovers between time series. For optimal portfolio allocation decisions, we analyze the multiscale behavior of hedge ratio. Empirical results show strong evidence of significant volatility spillovers between oil and stock markets, as well as time-varying correlations for various market pairs. However, results of wavelet coherence indicate that in most, the WTI market was leading. In addition, it is stated that the decomposed volatility spillovers permit investors to adapt their hedging strategies.

Suggested Citation

  • Khalfaoui, R. & Boutahar, M. & Boubaker, H., 2015. "Analyzing volatility spillovers and hedging between oil and stock markets: Evidence from wavelet analysis," Energy Economics, Elsevier, vol. 49(C), pages 540-549.
    • Handle: RePEc:eee:eneeco:v:49:y:2015:i:c:p:540-549
    DOI: 10.1016/j.eneco.2015.03.023
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    More about this item

    Keywords

    Discrete wavelet analysis; Wavelet coherence; BEKK-GARCH; Volatility spillovers; Hedge ratio; Crude oil prices; Stock prices;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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