CONNECTEDNESS BETWEEN CRUDE OIL AND US EQUITIES: THE IMPACT OF THE COVID-19 PANDEMIC

Aktham Maghyereh and Hussein Abdoh ()
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Hussein Abdoh: Department of Accounting and Finance, The Citadel, The Military College of South Carolina, Charleston, SC, USA

Annals of Financial Economics (AFE), 2022, vol. 17, issue 04, 1-30

Abstract: This paper contributes to the literature by employing a multifractal cross-correlation analysis (MFCCA) to study the effect of the global COVID-19 pandemic on cross-correlations between oil and US equity markets. First, we examine the detrended moving average cross-correlation coefficient between oil and S&P 500 returns before and during COVID-19 and find that US stock markets became more correlated with oil during the pandemic in the long term. Second, we find that the pandemic has caused an increase in the long-range cross-correlations over the small fluctuations. Third, the MF-DCCA method shows that the pandemic caused an increase in cross-correlations between the two markets. In sum, the pandemic caused a closer correlation between oil and US equities in the long range and a deeper dynamic connection between oil and US equity markets, as indicated by the multifractality tests. We also investigate the connectedness between oil and the S&P 500 using a dynamic procedure based on time-varying parameter vector autoregression. We find that oil is a net transmitter of shocks to the forecast error variance of the S&P 500 during March, April and May 2020, whereas the S&P 500 is a net transmitter of shocks to oil variance early in the pandemic (January and February 2020).

Keywords: COVID-19 pandemic; oil; US equity; multifractality; cross-correlations; connectedness (search for similar items in EconPapers)
JEL-codes: G01 G11 G15 Q43 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:afexxx:v:17:y:2022:i:04:n:s2010495222500294

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DOI: 10.1142/S2010495222500294

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