Analyzing volatility spillovers and hedging between oil and stock markets: Evidence from wavelet analysis

Rabeh Khalfaoui (), M. Boutahar and H. Boubaker

Energy Economics, 2015, vol. 49, issue C, 540-549

Abstract: This paper examines the linkage of crude oil market (WTI) and stock markets of the G-7 countries. We study the mean and volatility spillovers of oil and stock market prices over various time horizons. We propose a new approach incorporating both multivariate GARCH models and wavelet analysis: wavelet-based MGARCH approach. We combine a bivariate GARCH-BEKK model with wavelet multiresolution analysis in order to capture the multiscale features of mean and volatility spillovers between time series. For optimal portfolio allocation decisions, we analyze the multiscale behavior of hedge ratio. Empirical results show strong evidence of significant volatility spillovers between oil and stock markets, as well as time-varying correlations for various market pairs. However, results of wavelet coherence indicate that in most, the WTI market was leading. In addition, it is stated that the decomposed volatility spillovers permit investors to adapt their hedging strategies.

Keywords: Discrete wavelet analysis; Wavelet coherence; BEKK-GARCH; Volatility spillovers; Hedge ratio; Crude oil prices; Stock prices (search for similar items in EconPapers)
JEL-codes: C5 C58 G1 G11 G15 G18 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (151)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:49:y:2015:i:c:p:540-549

DOI: 10.1016/j.eneco.2015.03.023

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