Dynamic spillover and connectedness between oil futures and European bonds

Walid Mensi, Khamis Hamed Al-Yahyaee, Xuan Vinh Vo and Sang Hoon Kang

The North American Journal of Economics and Finance, 2021, vol. 56, issue C

Abstract: This paper examines the spillovers and connectedness between crude oil futures and European bond markets (EBMs) having different maturities. We also analyze the hedging effectiveness of crude oil futures-bond portfolios in tranquil and turbulent periods. Using the spillovers index of Diebold and Yilmaz (2012, 2014), we show evidence of time-varying spillovers between markets under investigations, which varies between 65% and 83%. Moreover, three-month, six-month, one-year, three-year and thirty-year bonds and crude oil futures are net receivers of risk from other markets, whereas the remaining bonds are net contributors of risk to the other markets. Crude oil futures receive more risk from long-term than short-term bonds. Moreover, the magnitude of risk transmission is low for the pre-crisis and economic recovery periods. Crude oil futures market contributes significantly to the risk of other markets during the oil crisis and Brexit period. A portfolio risk analysis shows that that most investments should be in oil rather than bonds (except the short-term bonds). The hedge ratio is sensitive to market conditions, where the cost of hedging increases during GFC and ESDC period. Finally, a crude oil futures-bond portfolio offers the best hedging effectiveness during the COVID-19 pandemic period.

Keywords: Crude oil futures; European bonds; COVID-19; Spillover; Hedging effectiveness (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:56:y:2021:i:c:s1062940820302278

DOI: 10.1016/j.najef.2020.101342

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