Modelling and Testing Volatility Spillovers in Oil and Financial Markets for USA, UK and China

Chia-Lin Chang, Michael McAleer and Jiarong Tian

No EI2016-30, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: The primary purpose of the paper is to analyze the conditional correlations, conditional covariances, and co-volatility spillovers between international crude oil and associated financial markets. The paper investigates co-volatility spillovers (namely, the delayed effect of a returns shock in one physical or financial asset on the subsequent volatility or co-volatility in another physical or financial asset) between the oil and financial markets. The oil industry has four major regions, namely North Sea, USA, Middle East, and South-East Asia. Associated with these regions are two major financial centers, namely UK and USA. For these reasons, the data to be used are the returns on alternative crude oil markets, returns on crude oil derivatives, specifically futures, and stock index returns in UK and USA. The paper will also analyze the Chinese financial markets, where the data are more recent. The empirical analysis will be based on the diagonal BEKK model, from which the conditional covariances will be used for testing co-volatility spillovers, and policy recommendations. Based on these results, dynamic hedging strategies will be suggested to analyze market fluctuations in crude oil prices and associated financial markets.

Keywords: Co-volatility spillovers; crude oil; financial markets; spot; futures; diagonal BEKK; optimal dynamic hedging (search for similar items in EconPapers)
JEL-codes: C58 D53 G13 G31 O13 (search for similar items in EconPapers)
Pages: 45
Date: 2016-06-04
New Economics Papers: this item is included in nep-ene, nep-fmk and nep-ore
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https://repub.eur.nl/pub/93117/EI2016-30.pdf (application/pdf)

Related works:
Journal Article: Modeling and Testing Volatility Spillovers in Oil and Financial Markets for the USA, the UK, and China (2019)
Working Paper: Modelling and Testing Volatility Spillovers in Oil and Financial Markets for USA, UK and China (2016)
Working Paper: Modelling and testing volatility spillovers in oil and financial markets for USA, UK and China (2016)
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