Modeling oil price–US stock nexus: A VARMA–BEKK–AGARCH approach

Afees Salisu and Tirimisiyu Oloko

Energy Economics, 2015, vol. 50, issue C, 1-12

Abstract: This study adds to the existing literature on oil price–US stock nexus in three ways. First, it employs the VARMA–AGARCH model developed by McAleer et al. (2009) within the context of BEKK framework using West Texas Intermediate (WTI) and Brent as proxies for oil market and S&P stocks as a proxy for US stock market. Secondly, it modifies the model to include endogenously determined structural break using the general structure for analyzing breaks with unit roots in Perron (2006). Third, it uses the adopted model to compute optimal portfolio weight and hedge ratios between oil price and US stocks using different sample data based on the break date. On average, our empirical evidence suggests a significant positive return spillover from US stock market to oil market and bi-directional shock spillovers between the two markets. In addition, there is significant own asymmetric shock effect in both markets while volatility spillover from oil market to stock market became pronounced after the break which coincides with the period of global economic slowdown. Similarly, the results of portfolio management differ across the sample data. More importantly, we find that ignoring structural break when it exists may exaggerate hedging effectiveness.

Keywords: Oil price; S&P stocks; VARMA–BEKK–AGARCH; Spillover effect; Asymmetric effect; Portfolio management (search for similar items in EconPapers)
JEL-codes: C3 G12 Q43 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (96)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:50:y:2015:i:c:p:1-12

DOI: 10.1016/j.eneco.2015.03.031

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