Analysing volatility spillover between the oil market and the stock market in oil-importing and oil-exporting countries: Implications on portfolio management

Rabeh Khalfaoui, Suleman Sarwar and Aviral Tiwari

Resources Policy, 2019, vol. 62, issue C, 22-32

Abstract: This study analyses the volatility spillover between the oil market and the stock market of oil-importing and oil-exporting countries using daily data over the period from January 2010 to December 2016. The study also explores the portfolio and hedging implications based on dynamic conditional correlation (DCC) and corrected DCC (cDCC) GARCH models. For the analysis, we have used symmetric and asymmetric versions of DCC and cDCC models. Specifically, in the symmetric version of DCC and cDCC, the estimations are based on GARCH (1,1), and in the asymmetric version of DCC and cDDC, the estimations are based on GJR-GARCH (1,1), FIGARCH (1,1) and FIEGARCH (1,1) models, and for each case, we have explored the portfolio and hedging implications. Overall, the evidence indicates that oil-importing countries are severely affected by lagged oil price shocks, and there is less evidence of interdependence between stock markets for both oil-importing and oil-exporting countries. Further, we find that the lagged volatility in the oil market and stock market has a statistically significant impact on the current volatility in its respective markets. The results from the asymmetric analysis show that the magnitudes of the negative shocks are higher than those of the positive shocks. The overall results from portfolio optimization reveal that investors in oil-exporting countries should hold more oil assets in the portfolio to hedge the risk.

Keywords: Volatility spillover; Oil market; Stock markets; Oil-importing and oil-exporting countries; Portfolio and hedging implications; Symmetric and asymmetric DCC-GARCH models (search for similar items in EconPapers)
JEL-codes: F65 G11 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (66)

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Working Paper: Analysing volatility spillover between the oil market and the stock market in oil-importing and oil-exporting countries: Implications on portfolio management (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:62:y:2019:i:c:p:22-32

DOI: 10.1016/j.resourpol.2019.03.004

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