Correlation and Dependence between Oil Prices, Stock Returns, Policy Uncertainty, and Financial Stress During COVID-19 Pandemic: New Evidence from a Multicountry Analysis Using Cross-Quantilogram Method

Aviral Tiwari, Emmanuel Abakah, Richard Dwumfour and Luis Gil-Alana

Chapter 9 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 283-320 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this chapter, we examine risk spillover between the returns series of oil and stock prices of worst-affected countries due to the COVID-19 outbreak in unconditional and conditional frameworks, where the relationship was conditioned upon the US economic policy uncertainty and financial stress indices. Specifically, we used three different measures of oil prices, namely, WTI, OPEC, and Dubai oil prices. We also examined the risk spillover from US and Chinese stock markets to stock markets of affected countries, such as the UK, France, Germany, Italy, Spain, Switzerland, and Turkey, for the time period from 31st December 2019 to 22nd April 2020. Our results provide evidence that during the COVID-19 outbreak, Dubai and OPEC oil prices have had a strong positive effect on stock price when both of them are at their lower quantiles, which suggests that during extreme markets conditions, oil price affects stock price. Furthermore, evidence of the directional predictability from stock returns of the US/China to all other stock returns shows positive predictability from the US to France, Germany, Italy, Spain, Switzerland, and the UK at lower quantiles. Last but not least, when the relationships were conditioned by the policy uncertainty and financial stress, evidence of directional predictability became stronger and spread to more quantiles, suggesting that the interrelationships between oil price and stock price returns and between stock price returns of the US/China to all other stock price returns were not driven by the systemic risk but rather uncertainties during the COVID-19 outbreak.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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