The stock market - oil prices variability relationship in the USA: the financial crisis effect. (3rd February 2023)

• Record Type: Journal Article
• Authors: Kartsonakis-Mademlis, Dimitrios; Dritsakis, Nikolaos
• Is Part Of: International journal of computational economics and econometrics. Volume 13:Number 2(2023)
• Page Start: 129
• Page End: 152
• Publication Date: 2023-02-03
• Subjects: BEKK-GARCH model -- financial crisis -- stock market -- oil prices -- volatility spillover; Econometrics -- Periodicals; Economics -- Data processing -- Periodicals; 330.01519505
• Languages: English
• ISSNs: 1757-1170

Abstract

This paper employs bivariate GARCH models to investigate the relationship between Dow Jones industrial average index and crude oil Brent. The models are used to generate the conditional variances of our indices and test for volatility spillover effects. Our evidence supports that for the entire sample period, there is no causal relationship between the volatilities of Dow Jones and Brent. For the period before the financial crisis, there is evidence of a unidirectional link regarding the transmission of shocks from the stock to the oil market and a bidirectional link concerning the volatility spillover between the markets. Considering the period of the crisis, bidirectional shock and volatility linkages are found. In contrast, for the period after the financial crisis, only the effect of the transmission of shocks and volatility spillover from Dow Jones to Brent is significant. We also compute the optimal portfolio weights and dynamic risk-minimising hedge ratios to highlight the importance of our empirical results.