Volatility spillovers and dynamic conditional correlation between crude oil and stock market returns

Achraf Ghorbel, Mouna Boujelbène Abbes and Younes Boujelbène

International Journal of Managerial and Financial Accounting, 2012, vol. 4, issue 2, 177-194

Abstract: This paper investigates the volatility spillover and the dynamic correlation between crude oil and stock index returns. Monthly returns from January 1997 to December 2010 of the crude oil, oil-importing and oil-exporting stock indices are analysed using three multivariate GARCH specifications specifically the BEKK-GARCH model, the CCC-GARCH model and the DCC-GARCH model. Based on the BEKK-GARCH estimation results, we find strong evidence of volatility spillovers from crude oil to all oil-importing and oil-exporting stock markets. Based on the CCC model, the estimates of conditional correlations for returns across crude oil and market indexes are very low, which means the conditional shocks are correlated only in the same market. Though, the DCC estimates of the conditional correlations are always significant. This finding suggests that the assumption of constant conditional correlations is not supported empirically. The time varying correlations of crude oil and stocks returns do not differ for oil-importer or oil-exporter countries. Oil price shocks seem to have a significant impact on the relationship between oil and stock indices returns in world turmoil periods. The extent of the effect of the 2008 stock market crash on the correlation coefficients is significantly important than those of the previous financial crises.

Keywords: oil returns; stock markets; volatility spillovers; GARCH-BEKK; CCC-GARCH; DCC-GARCH; dynamic correlation; crude oil; oil imports; oil exports; oil price shocks. (search for similar items in EconPapers)
Date: 2012
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