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Oil and equity: too deep into each other

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Abstract

The volatility in oil prices has impact far beyond its own sector. In this paper, after verifying for series stationarity and existence of cointegration, we employ DCC-GARCH multivariate model to capture the volatility spillover between oil prices, stock market, and the US economy between 2005 and June 2016. Our results show that financial assets represented by real estate, basic materials, consumer services, consumer goods, and financial sectors, but not the real output, are the major participants in volatility transmission and that the magnitude of volatility transmission changes from time of rising prices (negative volatility) to the time of falling prices (positive volatility). The empirical insights from such study are equally important for accurate asset pricing, hedging strategies, portfolio and derivatives management.

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Notes

  1. Empirical model as illustrated by Degiannakis et al. (2011) “Dynamic Correlation Between Stock Market and Oil Prices: the Case of Oil-Importing and Oil-Exporting Countries,” International Review of Financial Analysis, 20, 3, 152–164.

  2. All tables (Tables 15) and figures (Figs. 13) are presented in the Appendix section at the end of the manuscript.

  3. Dickey and Fuller (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root, Econometrica, 49, 1057–1072.

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Correspondence to Harmeet Singh.

Appendix

Appendix

Table 1 Descriptive statistics, monthly percentage change
Table 2 Dickey fuller unit root test
Table 3 Johansen likelihood Co-integration test
Table 4 DCC-GARCH results for sub-period 2005–2010
Table 5 DCC-GARCH results for sub-period 2011-June 2016
Fig. 1
figure 1

Relationship between DJ Financial Index and 10-year US Treasuries

Fig. 2
figure 2

a Relationship between DJ Oil & Gas Index and OK WTI Spot Price, $/Barrel 2005–2010. b Relationship between DJ Oil & Gas Index and OK WTI Spot Price, $/Barrel 2011 – June 2016

Fig. 3
figure 3

Relationship between DJ Consumer Goods Index and DJ Consumer Services Index 2011 – June 2016

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Delcoure, N.(., Singh, H. Oil and equity: too deep into each other. J Econ Finan 42, 89–111 (2018). https://doi.org/10.1007/s12197-017-9387-9

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  • DOI: https://doi.org/10.1007/s12197-017-9387-9

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