Realized volatility transmission from crude oil to equity sectors: A study with economic significance analysis
International Review of Economics & Finance, 2017, vol. 49, issue C, 149-167
The study examines the realized volatility transmission from crude oil to various equity sectors (Automobiles, Financials, Industrial, Telecom and Pharmaceuticals) using the Heterogeneous Autoregressive Distributed Lag (HAR-DL) framework. We also consider factors representing orthogonalized realized volatility components of S&P 500 in the HAR-DL framework. The full sample analysis provides evidence of significant short-term realized volatility transmission from crude oil to the given equity sectors. The findings based on the time-varying analysis support the evidence that volatility transmission from crude oil to equity sectors is structurally unstable and exhibits structural breaks. Incorporating structural breaks in the realized volatility partially explains the structural breaks in realized volatility transmission from crude oil to equity sectors. We also examine the influence of conditional heteroskedasticity in volatility series on the measured volatility transmission and find that conditional heteroskedasticity plays a significant role in explaining the measured volatility transmission from crude oil to equity sectors. The economic significance analysis indicates that the information from crude oil market can be used to earn substantial economic gain in returns by investing in portfolios representing the given equity sectors.
Keywords: Volatility transmission; Crude oil; Equity sectors; Contagion; Realized volatility; Structural breaks (search for similar items in EconPapers)
JEL-codes: C32 C58 Q4 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:49:y:2017:i:c:p:149-167
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