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On the risk spillover across the oil market, stock market, and the oil related CDS sectors: A volatility impulse response approach

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  • Balcilar, Mehmet
  • Hammoudeh, Shawkat
  • Toparli, Elif Akay

Abstract

Compared to Credit Default Swap (CDS) literature, this study focuses on the magnitude of volatility transmission and the risk spillover mechanism across the oil market, financial market risks, and the oil-related CDS sectors. Our dataset includes futures prices of West Texas Intermediate (WTI) and seven different measures of markets and credit risks. Four of the vast risk measures are the oil-related CDSs for auto, chemicals, natural gas, and utility sectors. In addition, three measures of the financial market risk, the one-month expected equity volatility measured by VIX, MOVE and SMOVE are included. The daily dataset covers the period from 6 January 2004 to 2 February 2016. The volatility transmission mechanism across the oil and financial markets and CDS sectors is examined using the volatility impulse response model. We evaluate the risk transmission due to several recent crisis shocks around the world and the results show complicated transmission mechanisms that spread over long periods. Among these events, the Lehman Brothers bankruptcy has destabilizing effects on all oil-related sectors. Findings also show that all oil market related shocks have significant risk transmission effects.

Suggested Citation

  • Balcilar, Mehmet & Hammoudeh, Shawkat & Toparli, Elif Akay, 2018. "On the risk spillover across the oil market, stock market, and the oil related CDS sectors: A volatility impulse response approach," Energy Economics, Elsevier, vol. 74(C), pages 813-827.
    • Handle: RePEc:eee:eneeco:v:74:y:2018:i:c:p:813-827
    DOI: 10.1016/j.eneco.2018.07.027
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    More about this item

    Keywords

    Risk; Sectoral CDS; VIX; MOVE; SMOVE; Volatility impulse response;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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