Shocks and Herding Contagion in the Oil and Stock Markets

Achraf Ghorbel, Mouna Boujelbene and Younes Boujelbene

The IUP Journal of Applied Finance, 2013, vol. 19, issue 4, 20-40

Abstract: This paper presents empirical evidence of herding contagion between oil market and stock markets, during the oil shock and the US financial crisis period of 2008-2009, after controlling fundamentals-driven comovements. We estimate the forecasting errors of time-varying parameters using the Kalman filter for oil market and 23 stock markets of oil importing and oil exporting countries, which are independent of macroeconomic fundamental factors. A sharp increase in conditional volatility of the forecasting errors is observed in oil market and stock markets during the turmoil period. To capture the pure contagion effects between oil market and stock markets, we analyze the dynamic correlation between forecasting errors of oil price returns and stock indices returns. The empirical results show a significant increase in time-varying correlation coefficients during the oil crisis and the US financial crisis period of 2008-09, which indicates a strong evidence of herding contagion between oil market and stock markets.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:icf:icfjaf:v:19:y:2013:i:4:p:20-40

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