Asymmetric volatility spillovers between world oil prices and stock markets of the G7 countries in the presence of structural breaks

Dimitrios Kartsonakis‐Mademlis and Nikolaos Dritsakis

International Journal of Finance & Economics, 2021, vol. 26, issue 3, 3930-3944

Abstract: The purpose of this paper is to examine the volatility transmission between oil prices and the seven major stock markets (G7) using symmetric and asymmetric bivariate GARCH models incorporating structural breaks. Since these countries play a crucial role in the international economy, it is important for financial market participants to understand the volatility transmission process for designing optimal portfolio allocations. We examine weekly data over the period 1998–2017 and endogenously detect structural breaks in variance using an iterated algorithm in order to estimate the volatility dynamics with greater accuracy. The models were estimated using the maximum likelihood method, and the BFGS algorithm was employed to obtain the variance–covariance estimation and the corresponding standard errors. Overall, we find volatility spillovers between markets together with the fact that the oil market has a leading role. More importantly, we show that neglecting structural changes in variance and/or asymmetries may lead to biased volatility spillover effects. Furthermore, the results highlight that models ignoring structural breaks are significantly overestimating the effect of their own past volatility on the current volatility. In addition, we find that disregarding asymmetries could also lead to erroneous estimates of these effects. Finally, we compute dynamic risk‐minimizing hedge ratios and optimal portfolio weights, however, no significant discrepancies are found among the models considered.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1002/ijfe.1997

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:26:y:2021:i:3:p:3930-3944

Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307

Access Statistics for this article

International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().