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Volatility spillovers and hedging effectiveness between the oil market and Eurozone sectors: A tale of two crises

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  • Belhassine, Olfa

Abstract

This paper aims to analyze the mean and volatility spillovers between oil prices and the Eurozone supersector returns. It uses daily data of the Brent prices and 19 Eurozone supersector indices for the period from August 2004 to August 2015. This area experienced two important instabilities in that period, the global financial crisis (GFC) and the Euro debt crisis (EDC). Because financial turbulences are suspected to induce changes in the volatility dynamics, the full sample is divided into three sub-samples. Empirically, this study employs a bivariate VAR-BEKK-GARCH model that allows for transmission in volatility. The obtained volatilities and covariances are used to compute the optimal weights and hedge ratios for oil–stock portfolio holdings. The findings show that both mean and volatility spillovers between the oil market and the different Eurozone sectors are time-varying and heterogeneous. In the GFC sub-period, there is evidence of contagion effects because there is an intensification of volatility spillovers. The EDC does not seem to have induced any particular change in the spillover effects. The optimal weights, hedge ratios, and correlation analysis results allow an accurate understanding of the time series relationship between the two markets and are useful for financial market participants and policymakers.

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  • Belhassine, Olfa, 2020. "Volatility spillovers and hedging effectiveness between the oil market and Eurozone sectors: A tale of two crises," Research in International Business and Finance, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:riibaf:v:53:y:2020:i:c:s0275531918310638
    DOI: 10.1016/j.ribaf.2020.101195
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    More about this item

    Keywords

    Eurozone supersectors; Oil market; VAR-BEKK-GARCH; Volatility spillovers; Mean spillovers; Hedge ratio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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