Modeling Conditional Correlations for Risk Diversification in Crude Oil Markets
National Chung Hsing University - Department of Applied Economics, Department of Finance
Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics
Maejo University - Faculty of Economics
May 8, 2009
This paper estimates univariate and multivariate conditional volatility and conditional correlation models of spot, forward and futures returns from three major benchmarks of international crude oil markets, namely Brent, WTI and Dubai, to aid in risk diversification. Conditional correlations are estimated using the CCC model of Bollerslev (1990), VARMA-GARCH model of Ling and McAleer (2003), VARMA-AGARCH model of McAleer et al. (2009), and DCC model of Engle (2002). The paper also presents the ARCH and GARCH effects for returns and shows the presence of significant interdependences in the conditional volatilities across returns for each market. The estimates of volatility spillovers and asymmetric effects for negative and positive shocks on conditional variance suggest that VARMA-GARCH is superior to the VARMA-AGARCH model. In addition, the DCC model gives statistically significant estimates for the returns in each market, which shows that constant conditional correlations do not hold in practice.
Number of Pages in PDF File: 26
Keywords: conditional correlations, crude oil spot prices, forward prices, futures prices, risk diversification
JEL Classification: C22, C32, G17, G32
Date posted: May 10, 2009
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 1.140 seconds