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Oil and US stock market shocks: implications for Canadian equities

Reinhold Heinlein and Scott Mahadeo
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Reinhold Heinlein: University of the West of England

No 2021-07, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: Oil and US stock market shocks are expected to be relevant for Canadian equities, as Canada is an oil-exporter adjacent to the US. We evaluate how the relationship between Canadian stock market indices and such external shocks change under extraordinary events. To do this, we subject statistically identified oil and S&P 500 market shocks to a surprise filter, which detects shocks with the greatest magnitude occurring over a given lookback period; and an outlier filter, which detects extrema shocks that exceed a normal range. Then, we examine how the dependence structure between shocks and Canadian equities change under the extreme surprise and outlier episodes through various co-moment spillover tests. Our results show that co-moments beyond correlation are important in reflecting the changes occurring in the relationships between external shocks and Canadian equities in extreme events. Additionally, the differences in findings under extreme positive and negative shocks provide evidence for asymmetric spillover effects from the oil and US stock markets to Canadian equities. Moreover, the observed heterogeneity in the relationships between disaggregated Canadian equities and shocks in the crude oil and S&P 500 markets are useful to policymakers for revealing sector-specific vulnerabilities, and provide portfolio diversification opportunities for investors to exploit.

Keywords: Canada; oil market; spillover; stock market (search for similar items in EconPapers)
JEL-codes: C32 G15 Q43 (search for similar items in EconPapers)
Pages: 33
Date: 2021-07-10
New Economics Papers: this item is included in nep-ene, nep-fmk, nep-isf and nep-rmg
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