Dynamic connectedness between crude oil and equity markets: What about the effects of firm's solvency and profitability positions?

Faruk Balli, Hatice O Balli and Thi Thu Ha Nguyen

Journal of Commodity Markets, 2023, vol. 31, issue C

Abstract: The paper aims to explore the presence of connectedness between oil price changes and stock returns of oil & gas sector. The analysis, adopting the connectedness approach developed by and the frequency connectedness developed by demonstrates a high level of connectedness, especially during the extreme economic meltdown. The short-term (1–5 days) level of total connectedness is substantially higher than the medium-term (5–30 days) and long-term levels (30–262 days). In addition, when examining the impact of the sectors' financial characteristics on the extent of the connectedness, we found that sectors with greater solvency position (lower debt to asset ratio and higher interest coverage) are less connected with the oil price changes. The impact of sector's solvency position on connectedness (between stock return and oil prices) is even more obvious for financially more open markets. Also, change in oil prices have a less impact on the returns of sectors with higher profitability ratios. The paper, therefore, brings several implications to both policy makers and investors.

Keywords: Connectedness; Frequency connectedness; Oil & gas sector; Profitability; Solvency ratio (search for similar items in EconPapers)
JEL-codes: C33 C58 F36 G15 Q40 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:31:y:2023:i:c:s2405851323000387

DOI: 10.1016/j.jcomm.2023.100348

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