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Return transmission and asymmetric volatility spillovers between oil futures and oil equities: New DCC-MEGARCH analyses

Chikashi Tsuji

Economic Modelling, 2018, vol. 74, issue C, 167-185

Abstract: Applying our newly extended vector autoregressive (VAR) dynamic conditional correlation (DCC) asymmetric spillover (AS) multivariate exponential generalized autoregressive conditional heteroscedasticity (MEGARCH) model with skew-t errors, this paper investigates return transmission and volatility spillovers between oil futures and international oil and gas sector equity returns. Employing a global perspective, and using six international oil and gas sector equity index returns for North America, Latin America, Developed Europe, Emerging Europe, the Far East, and BRIC alongside the WTI oil futures return, we obtain the following findings. First, we reveal unidirectional return transmission from oil futures to oil equities for Developed Europe, Emerging Europe, the Far East, and BRIC. Second, we find unidirectional return transmission from North American oil equities to oil futures, and mostly bidirectional return transmission between oil futures and Latin American oil equities. Moreover, we reveal unidirectional asymmetric volatility spillover effects from all the six oil equities to oil futures except for the Far East, where we observe mostly bidirectional asymmetric volatility spillovers. Furthermore, using the conditional variances and covariances from our new model, we also compute more precise time-varying optimal hedge ratios and optimal portfolio weights, and clarify that in international markets, hedging oil equities with oil is cheaper than vice versa.

Keywords: DCC model; MGARCH model; Leverage effect; Oil equities; Oil futures; Return transmission; Skew-t errors; Spillovers (search for similar items in EconPapers)
JEL-codes: G11 G13 G15 Q43 (search for similar items in EconPapers)
Date: 2018
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