Dependences and volatility spillovers between the oil and stock markets: New evidence from the copula and VAR-BEKK-GARCH models

TY - JOUR

T1 - Dependences and volatility spillovers between the oil and stock markets

T2 - New evidence from the copula and VAR-BEKK-GARCH models

AU - Yu, Lean

AU - Zha, Rui

AU - Stafylas, Dimitrios

AU - He, Kaijian

AU - Liu, Jia

N1 - Funding Information: This work was partially supported by grants from the Key Program of National Natural Science Foundation of China (NSFC nos. 71433001 , 71631005 ), National Natural Science Foundation of China (NSFC No. 71671013 ), the National Program for Support of Top-Notch Young Professionals , Beijing Advanced Innovation Center for Soft Matter Science and Engineering , Humanities and Social Sciences Youth Foundation of Ministry of Education of China (No. 16YJC790026 ). Publisher Copyright: © 2018 Elsevier Inc.

PY - 2020/3

Y1 - 2020/3

N2 - This paper examines the dynamic relationship between the oil market and stock markets from two perspectives: dependence between the crude oil market (WTI) and stock markets of the US and China, and volatility spillovers between them during 1991–2016. We further analyze structural breaks of market dependences and consider the extent of their influence on such relationships. Our vine-copula results show that the dependences between the three paired markets, WTI-US, WTI-China and US-China, vary dynamically across the six identified structural break periods. In particular, the dependence between WTI-US is stronger and more volatile than that between WTI-China during most of the periods. The dependence between US-China remains at a lower level in the earlier periods, but increases in the final period. Our VAR-BEKK-GARCH results demonstrate distinctive volatility spillovers across these periods, with varying directionality, in response to the structural changes. Overall, our results indicate that the oil market stimulates rapid and continual fluctuations in market dependences, which become manifest most acutely in the aftermath of the Financial Crisis of 2007–08, demonstrating the increasing interdependence between the oil and stock markets. Further, the growing influence of China on the dynamics of these relationships, in the period following the Great Recession, presents evidence that it begins to assume an increasingly important role in global economic recovery.

AB - This paper examines the dynamic relationship between the oil market and stock markets from two perspectives: dependence between the crude oil market (WTI) and stock markets of the US and China, and volatility spillovers between them during 1991–2016. We further analyze structural breaks of market dependences and consider the extent of their influence on such relationships. Our vine-copula results show that the dependences between the three paired markets, WTI-US, WTI-China and US-China, vary dynamically across the six identified structural break periods. In particular, the dependence between WTI-US is stronger and more volatile than that between WTI-China during most of the periods. The dependence between US-China remains at a lower level in the earlier periods, but increases in the final period. Our VAR-BEKK-GARCH results demonstrate distinctive volatility spillovers across these periods, with varying directionality, in response to the structural changes. Overall, our results indicate that the oil market stimulates rapid and continual fluctuations in market dependences, which become manifest most acutely in the aftermath of the Financial Crisis of 2007–08, demonstrating the increasing interdependence between the oil and stock markets. Further, the growing influence of China on the dynamics of these relationships, in the period following the Great Recession, presents evidence that it begins to assume an increasingly important role in global economic recovery.

KW - Copula model

KW - Dependence

KW - Multivariate GARCH model

KW - Oil market

KW - Stock market

KW - Volatility spillover

UR - http://www.scopus.com/inward/record.url?scp=85061113973&partnerID=8YFLogxK

U2 - 10.1016/j.irfa.2018.11.007

DO - 10.1016/j.irfa.2018.11.007

M3 - Article

AN - SCOPUS:85061113973

SN - 1057-5219

VL - 68

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

M1 - 101280

ER -