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Recent hikes in oil-equity market correlations: Transitory or permanent?

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  • Zhang, Bing
  • Li, Xiao-Ming

Abstract

This paper empirically examines the long-run behavior of eight oil-equity correlations based on the ADCC (asymmetric dynamic conditional correlation) model and a novel decomposing approach. We select equity price indexes from three developed countries (the US, the UK and Germany) and five BRICS member countries (Brazil, Russia, India, China and South Africa) and consider ten economic/financial events for investigation. Seven correlations exhibit a positively sloped trend, and one exhibits a horizontal trend. All of these trends have undergone one or two structural breaks, which moved the corresponding correlations to their highest-ever evolutionary paths. These structural breaks are associated with one or more of the ten episodes considered, and a common event impacting all eight of the correlation trends is detected to be the 2008 adverse oil shock. The broken trends explain why the correlations were low in the early years and high in the recent years. Our findings indicate that recent hikes in the oil-equity correlations are a long-run phenomenon.

Suggested Citation

  • Zhang, Bing & Li, Xiao-Ming, 2016. "Recent hikes in oil-equity market correlations: Transitory or permanent?," Energy Economics, Elsevier, vol. 53(C), pages 305-315.
  • Handle: RePEc:eee:eneeco:v:53:y:2016:i:c:p:305-315
    DOI: 10.1016/j.eneco.2014.03.011
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Wen, Danyan & Wang, Gang-Jin & Ma, Chaoqun & Wang, Yudong, 2019. "Risk spillovers between oil and stock markets: A VAR for VaR analysis," Energy Economics, Elsevier, vol. 80(C), pages 524-535.
    2. F. Benedetto & L. Mastroeni & P. Vellucci, 0. "Modeling the flow of information between financial time-series by an entropy-based approach," Annals of Operations Research, Springer, vol. 0, pages 1-18.
    3. Marcin Wk{a}torek & Stanis{l}aw Dro.zd.z & Pawe{l} O'swic{e}cimka & Marek Stanuszek, 2018. "Multifractal cross-correlations between the World Oil and other Financial Markets in 2012-2017," Papers 1812.08548, arXiv.org, revised Jun 2019.
    4. Hassan, Kamrul & Hoque, Ariful & Gasbarro, Dominic, 2019. "Separating BRIC using Islamic stocks and crude oil: dynamic conditional correlation and volatility spillover analysis," Energy Economics, Elsevier, vol. 80(C), pages 950-969.
    5. Huiming Zhu & Xianfang Su & Wanhai You & Yinghua Ren, 2017. "Asymmetric effects of oil price shocks on stock returns: evidence from a two-stage Markov regime-switching approach," Applied Economics, Taylor & Francis Journals, vol. 49(25), pages 2491-2507, May.
    6. Mishra, Shekhar & Sharif, Arshian & Khuntia, Sashikanta & Meo, Muhammad Saeed & Rehman Khan, Syed Abdul, 2019. "Does oil prices impede Islamic stock indices? Fresh insights from wavelet-based quantile-on-quantile approach," Resources Policy, Elsevier, vol. 62(C), pages 292-304.
    7. Miroslava Zavadska & Lucía Morales & Joseph Coughlan, 2018. "The Lead–Lag Relationship between Oil Futures and Spot Prices—A Literature Review," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 6(4), pages 1-1, October.
    8. Zhang, Yue-Jun & Chevallier, Julien & Guesmi, Khaled, 2017. "“De-financialization” of commodities? Evidence from stock, crude oil and natural gas markets," Energy Economics, Elsevier, vol. 68(C), pages 228-239.
    9. Manel Youssef & Khaled Mokni, 2019. "Do Crude Oil Prices Drive the Relationship between Stock Markets of Oil-Importing and Oil-Exporting Countries?," Economies, MDPI, Open Access Journal, vol. 7(3), pages 1-1, July.
    10. Nagayev, Ruslan & Disli, Mustafa & Inghelbrecht, Koen & Ng, Adam, 2016. "On the dynamic links between commodities and Islamic equity," Energy Economics, Elsevier, vol. 58(C), pages 125-140.

    More about this item

    Keywords

    Oil; Equity; Conditional correlations; Structural break;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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