Dynamic relations between oil and stock markets: Volatility spillovers, networks and causality

Jose Gomez-Gonzalez, Jorge Hirs-Garzon and Sebastián Sanín-Restrepo
Authors registered in the RePEc Author Service: Sebastian Sanin Restrepo, Sr.

International Economics, 2021, vol. 165, issue C, 37-50

Abstract: We study the relation between oil and stock market returns for a set of seven countries that are important participants in commodity markets. Observed oil prices are decomposed into a supply related factor, a demand related factor and a risk factor. Total and directional spillover indicators are computed using forecast error variance decomposition from vector autoregressions, and their dynamic nature is explored. Studying time-varying spillovers between commodity and traditional financial markets is crucial for the design of effective portfolio composition and risk diversification strategies in global financial markets. Our findings suggest that oil markets are net volatility receptors. While some recent studies suggest that results may depend on whether supply or demand factors are considered, this study finds major stock markets are net volatility transmitters to oil markets. Transmission intensities and net positions present, however, considerable time variation being substantially larger in moments of financial distress with respect to normal times. Furthermore, results from dynamic predictive causality tests show the existence of bidirectional relations, which are stronger from stock to oil markets. Our findings provide empirical evidence supporting the oil markets financialization hypothesis.

Keywords: Time-varying causality; Oil price; Stock market returns; Emerging market economies (search for similar items in EconPapers)
JEL-codes: C22 G01 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Dynamic relations between oil and stock markets: Volatility spillovers, networks and causality (2021)
Working Paper: Dynamic relations between oil and stock markets: Volatility spillovers, networks and causality (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:165:y:2021:i:c:p:37-50

DOI: 10.1016/j.inteco.2020.11.004

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