IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

The connectedness between crude oil and financial markets: Evidence from implied volatility indices

Listed author(s):
  • Awartani, Basel
  • Aktham, Maghyereh
  • Cherif, Guermat
Registered author(s):

    In this paper we exploit newly introduced implied volatility indexes to investigate the directional risk transfer from oil to US equities, Euro/Dollar exchange rates, precious metals and agricultural commodities. We find significant volatility transmission from oil to equities but little transmission to agricultural commodities. The total pairwise directional connectedness to equities is around 20.4%, while it is only 1.6%, 1.0% and 2.0% to wheat, corn, and soybeans respectively. The risk spillover from oil to precious metals and Euro/Dollar foreign exchange rates is moderate. For instance, the oil market uncertainty spills 11.0%, 11.1% and 8.9% to gold, silver and Euro/Dollar exchange rate respectively. The volatility crossover from all of these markets to oil is tiny, implying that oil is the main driver of its association with these markets. Finally, we provide evidence that the transmission from oil to other markets has increased since the collapse of oil prices in July 2014.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S2405851315301100
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Commodity Markets.

    Volume (Year): 4 (2016)
    Issue (Month): 1 ()
    Pages: 56-69

    as
    in new window

    Handle: RePEc:eee:jocoma:v:4:y:2016:i:1:p:56-69
    DOI: 10.1016/j.jcomm.2016.11.002
    Contact details of provider: Web page: http://www.elsevier.com/locate/jcomm

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Blose, Laurence E., 2010. "Gold prices, cost of carry, and expected inflation," Journal of Economics and Business, Elsevier, vol. 62(1), pages 35-47, January.
    2. Dirk G. Baur & Brian M. Lucey, 2010. "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold," The Financial Review, Eastern Finance Association, vol. 45(2), pages 217-229, 05.
    3. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
    4. Reboredo, Juan C., 2012. "Modelling oil price and exchange rate co-movements," Journal of Policy Modeling, Elsevier, vol. 34(3), pages 419-440.
    5. FrancisX. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, 01.
    6. Tully, Edel & Lucey, Brian M., 2007. "A power GARCH examination of the gold market," Research in International Business and Finance, Elsevier, vol. 21(2), pages 316-325, June.
    7. Büyükşahin, Bahattin & Robe, Michel A., 2014. "Speculators, commodities and cross-market linkages," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 38-70.
    8. Bentes, Sónia R., 2015. "A comparative analysis of the predictive power of implied volatility indices and GARCH forecasted volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 424(C), pages 105-112.
    9. Park, Jungwook & Ratti, Ronald A., 2008. "Oil price shocks and stock markets in the U.S. and 13 European countries," Energy Economics, Elsevier, vol. 30(5), pages 2587-2608, September.
    10. Diebold, Francis X. & Yılmaz, Kamil, 2014. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Journal of Econometrics, Elsevier, vol. 182(1), pages 119-134.
    11. Christopher L. Gilbert, 2010. "How to Understand High Food Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 398-425.
    12. Jun Yang & Huanguang Qiu & Jikun Huang & Scott Rozelle, 2008. "Fighting global food price rises in the developing world: the response of China and its effect on domestic and world markets," Agricultural Economics, International Association of Agricultural Economists, vol. 39(s1), pages 453-464, November.
    13. Awartani, Basel & Maghyereh, Aktham I. & Shiab, Mohammad Al, 2013. "Directional spillovers from the U.S. and the Saudi market to equities in the Gulf Cooperation Council countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 224-242.
    14. Sari, Ramazan & Hammoudeh, Shawkat & Chang, Chia-Lin & McAleer, Michael, 2012. "Causality between market liquidity and depth for energy and grains," Energy Economics, Elsevier, vol. 34(5), pages 1683-1692.
    15. Awartani, Basel & Maghyereh, Aktham Issa, 2013. "Dynamic spillovers between oil and stock markets in the Gulf Cooperation Council Countries," Energy Economics, Elsevier, vol. 36(C), pages 28-42.
    16. Broner, Fernando A. & Gaston Gelos, R. & Reinhart, Carmen M., 2006. "When in peril, retrench: Testing the portfolio channel of contagion," Journal of International Economics, Elsevier, vol. 69(1), pages 203-230, June.
    17. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, 04.
    18. Charles J. Corrado & Thomas W. Miller, Jr., 2005. "The forecast quality of CBOE implied volatility indexes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(4), pages 339-373, 04.
    19. Stefan Klößner & Sven Wagner, 2014. "Exploring All Var Orderings For Calculating Spillovers? Yes, We Can!—A Note On Diebold And Yilmaz (2009)," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(1), pages 172-179, 01.
    20. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
    21. Cong, Rong-Gang & Wei, Yi-Ming & Jiao, Jian-Lin & Fan, Ying, 2008. "Relationships between oil price shocks and stock market: An empirical analysis from China," Energy Policy, Elsevier, vol. 36(9), pages 3544-3553, September.
    22. Anna Pavlova & Roberto Rigobon, 2008. "The Role of Portfolio Constraints in the International Propagation of Shocks," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1215-1256.
    23. Driesprong, Gerben & Jacobsen, Ben & Maat, Benjamin, 2008. "Striking oil: Another puzzle?," Journal of Financial Economics, Elsevier, vol. 89(2), pages 307-327, August.
    24. Apergis, Nicholas & Miller, Stephen M., 2009. "Do structural oil-market shocks affect stock prices?," Energy Economics, Elsevier, vol. 31(4), pages 569-575, July.
    25. Blair, Bevan J. & Poon, Ser-Huang & Taylor, Stephen J., 2001. "Modelling S&P 100 volatility: The information content of stock returns," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1665-1679, September.
    26. David P. Simon, 2002. "Implied volatility forecasts in the grains complex," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(10), pages 959-981, October.
    27. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    28. Baur, Dirk G. & McDermott, Thomas K., 2010. "Is gold a safe haven? International evidence," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1886-1898, August.
    29. Maghyereh, Aktham I. & Awartani, Basel & Hilu, Khalil Al, 2015. "Dynamic transmissions between the U.S. and equity markets in the MENA countries: New evidence from pre- and post-global financial crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 56(C), pages 123-138.
    30. Chen, Shiu-Sheng, 2010. "Do higher oil prices push the stock market into bear territory?," Energy Economics, Elsevier, vol. 32(2), pages 490-495, March.
    31. Michael Melvin & Jahangir Sultan, 1990. "South African political unrest, oil prices, and the time varying risk premium in the gold futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 10(2), pages 103-111, 04.
    32. Deb, Partha & Trivedi, Pravin K & Varangis, Panayotis, 1996. "The Excess Co-movement of Commodity Prices Reconsidered," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 275-291, May-June.
    33. Kanas, Angelos, 2012. "Modelling the risk–return relation for the S&P 100: The role of VIX," Economic Modelling, Elsevier, vol. 29(3), pages 795-809.
    34. Du, Xiaodong & Yu, Cindy L. & Hayes, Dermot J., 2011. "Speculation and volatility spillover in the crude oil and agricultural commodity markets: A Bayesian analysis," Energy Economics, Elsevier, vol. 33(3), pages 497-503, May.
    35. Umberto Triacca, 2007. "On the variance of the error associated to the squared return as proxy of volatility," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(4), pages 255-257.
    36. Andrew C. Worthington & Mosayeb Pahlavani, 2007. "Gold investment as an inflationary hedge: cointegration evidence with allowance for endogenous structural breaks," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(4), pages 259-262.
    37. Baffes, John, 2007. "Oil spills on other commodities," Resources Policy, Elsevier, vol. 32(3), pages 126-134, September.
    38. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
    39. Foster, Dean P & Nelson, Daniel B, 1996. "Continuous Record Asymptotics for Rolling Sample Variance Estimators," Econometrica, Econometric Society, vol. 64(1), pages 139-174, January.
    40. Mark W. Rosegrant & Tingju Zhu & Siwa Msangi & Timothy Sulser, 2008. "Global Scenarios for Biofuels: Impacts and Implications ," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(3), pages 495-505.
    41. Antonakakis, Nikolaos & Kizys, Renatas, 2015. "Dynamic spillovers between commodity and currency markets," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 303-319.
    42. Capie, Forrest & Mills, Terence C. & Wood, Geoffrey, 2005. "Gold as a hedge against the dollar," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(4), pages 343-352, October.
    43. Mark, Joy, 2011. "Gold and the US dollar: Hedge or haven?," Finance Research Letters, Elsevier, vol. 8(3), pages 120-131, September.
    44. Abbott, Philip C. & Hurt, Christopher & Tyner, Wallace E., 2009. "What's Driving Food Prices? March 2009 Update," Issue Reports 48495, Farm Foundation.
    45. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-528, June.
    46. McMillan, David G. & Speight, Alan E.H., 2010. "Return and volatility spillovers in three euro exchange rates," Journal of Economics and Business, Elsevier, vol. 62(2), pages 79-93, March.
    47. Antonakakis, Nikolaos, 2012. "Exchange return co-movements and volatility spillovers before and after the introduction of euro," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1091-1109.
    48. Soytas, Ugur & Sari, Ramazan & Hammoudeh, Shawkat & Hacihasanoglu, Erk, 2009. "World oil prices, precious metal prices and macroeconomy in Turkey," Energy Policy, Elsevier, vol. 37(12), pages 5557-5566, December.
    49. Chang, Ting-Huan & Su, Hsin-Mei, 2010. "The substitutive effect of biofuels on fossil fuels in the lower and higher crude oil price periods," Energy, Elsevier, vol. 35(7), pages 2807-2813.
    50. Benjamin Hunt, 2006. "Oil Price Shocks and the U.S. Stagflation of the 1970s: Some Insights from GEM," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 61-80.
    51. Reboredo, Juan C., 2013. "Is gold a hedge or safe haven against oil price movements?," Resources Policy, Elsevier, vol. 38(2), pages 130-137.
    52. Mitchell, Donald, 2008. "A note on rising food prices," Policy Research Working Paper Series 4682, The World Bank.
    53. Juan Reboredo, 2010. "Nonlinear effects of oil shocks on stock returns: a Markov-switching approach," Applied Economics, Taylor & Francis Journals, vol. 42(29), pages 3735-3744.
    54. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 540-561, May.
    55. Gonzalez-Perez, Maria T., 2015. "Model-free volatility indexes in the financial literature: A review," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 141-159.
    56. Pindyck, Robert S & Rotemberg, Julio J, 1990. "The Excess Co-movement of Commodity Prices," Economic Journal, Royal Economic Society, vol. 100(403), pages 1173-1189, December.
    57. Nandha, Mohan & Faff, Robert, 2008. "Does oil move equity prices? A global view," Energy Economics, Elsevier, vol. 30(3), pages 986-997, May.
    58. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
    59. Zhang, Yue-Jun & Wei, Yi-Ming, 2010. "The crude oil market and the gold market: Evidence for cointegration, causality and price discovery," Resources Policy, Elsevier, vol. 35(3), pages 168-177, September.
    60. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    61. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
    62. Mohamed El Hedi Arouri & Christophe Rault, 2012. "Oil Prices And Stock Markets In Gcc Countries: Empirical Evidence From Panel Analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 242-253, 07.
    63. Sari, Ramazan & Hammoudeh, Shawkat & Soytas, Ugur, 2010. "Dynamics of oil price, precious metal prices, and exchange rate," Energy Economics, Elsevier, vol. 32(2), pages 351-362, March.
    64. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jocoma:v:4:y:2016:i:1:p:56-69. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.