Systemic risk spillovers between crude oil and stock index returns of G7 economies: Conditional value-at-risk and marginal expected shortfall approaches

In this study, we examine systemic risk and dependence between oil and stock market indices of G7 economies between January 2003 and November 2017. Coincidentally, this timeframe covers different distress periods in financial and energy markets. We use several time-constant, time-varying and time-varying Markov-copula models to examine the dependence. Further, we use the delta conditional value-at-risk (ΔCoVaR) of Adrian and Brunnermeier (2016) and marginal expected shortfall (MES) of Acharya et al. (2012) to captures the risk spillover effects and give evidence of systemic risk. From the copula analysis, we find dissimilar dependence structure between returns series of oil and the G7 stock markets. For France, Germany and Japan, the dependence is Markov-switching time-varying, while it is time-varying for the United States and Canada, constant for the United Kingdom and around zero for Italy. Our empirical evidence on systemic risk indicates that oil price dynamics contributes significantly more to the G7 stock market returns during volatile times than during tranquil times. In particular, the Canada stock market appears more sensitive and vulnerable to negative external shocks emerging from the crude oil market than the other markets. Further, the country risk rankings identified using MES and ΔCoVaR may not be identical. In addition, the analysis results suggest that the crude oil market can be a good diversifier for investors in Japan and France and that the investors in the rest of G7 countries must act more carefully.