Risk spillovers and hedge strategies between global crude oil markets and stock markets: Do regime switching processes combining long memory and asymmetry matter?

Ling Lin, Zhongbao Zhou, Yong Jiang and Yangchen Ou

The North American Journal of Economics and Finance, 2021, vol. 57, issue C

Abstract: This paper investigates risk spillovers and hedge strategies between global crude oil markets and stock markets. In the paper, we propose a multivariate long memory and asymmetry GARCH framework that integrates state-dependent regime switching in the mean process with multivariate long memory and asymmetry GARCH in the variance process. Our results first show that there are linear risk spillovers running from the US stock markets to the WTI oil market in the short term. However, the linear risk spillover effect running from the oil market to the US stock market can only exist in the long term. In addition, there is a bidirectional linear risk spillover effect between the European stock markets and the Brent oil market in the short and long terms. Furthermore, there is no linear risk spillover effect between the Dubai oil market and the Chinese stock market. Second, the nonlinear risk spillovers running from the WTI oil market to the US stock market can be found in the tranquil regime. Moreover, there is also a nonlinear risk spillover effect running from the European stock markets to the Brent oil market in the tranquil regime. In addition, the nonlinear risk spillover effect running from the Brent oil markets to the European stock market can be found in the crisis regime. Furthermore, there is bidirectional nonlinear Granger causality between the Dubai crude oil market and the Chinese stock market in the tranquil regime. Finally, dynamic hedge effectiveness shows that the regime switching process combined with long memory and asymmetry behavior seems to be a plausible and feasible way to conduct hedge strategies between the global crude oil markets and stock markets.

Keywords: Risk spillovers; Hedge strategy; Global stock markets; Global crude oil markets; Markov regime switching; Long memory and asymmetry GARCH (search for similar items in EconPapers)
JEL-codes: B22 C32 D81 E44 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:57:y:2021:i:c:s1062940821000334

DOI: 10.1016/j.najef.2021.101398

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