Crude Oil Price Volatility Spillovers into Major Equity Markets

20 Pages Posted: 24 Jun 2016

See all articles by Bahram Adrangi

Bahram Adrangi

University of Portland - Dr. Robert B. Pamplin, Jr. School of Business Administration

Arjun Chatrath

University of Portland - Dr. Robert B. Pamplin, Jr. School of Business Administration

Joseph Macri

Macquarie University - Department of Economics; Macquarie University, Macquarie Business School

Kambiz Raffiee

University of Nevada, Reno - College of Business Administration - Department of Economics

Date Written: March 20, 2015

Abstract

This paper investigates the daily volatility spillovers between crude oil prices and equity indexes in several developed markets. We find that the price and index series exhibit nonlinear dependencies that are inconsistent with chaotic structure. Bivariate vector autoregressive general autoregressive conditional heteroscedasticity (VARGARCH) estimations indicate bidirectional volatility spillovers. Finding evidence of asymmetric market responses to negative and positive shocks, we also estimate asymmetric bivariate VAR-exponential GARCH (VAR-EGARCH) models. We find shock transmissions to be asymmetric, whereby positive and negative shocks of the same size on oil prices have unequal impacts on the volatility of equities. Specifically, volatility responses and spillovers are more severe following negative news and shocks in each market. We further establish that there are causalities and feedback between crude oil prices and equity indexes in major developed economies. Considering the deleterious income and wealth effects of negative shocks to oil prices on the economies under study, our findings are in contrast to the notion that some economies are better able to weather negative shocks to the crude oil markets because of their increased efficiency or flexibility. Furthermore, maintaining adequate strategic crude oil reserves in the United States and other major economies is paramount in coping with shocks to crude oil supplies and price volatility.

Keywords: equity markets, crude oil, nonlinearity, asymmetry, EGARCH, Granger causality

Suggested Citation

Adrangi, Bahram and Chatrath, Arjun and Macri, Joseph and Raffiee, Kambiz, Crude Oil Price Volatility Spillovers into Major Equity Markets (March 20, 2015). Journal of Energy Markets, Vol. 8, No. 1, 2015. Available at SSRN: https://ssrn.com/abstract=2800078

Bahram Adrangi (Contact Author)

University of Portland - Dr. Robert B. Pamplin, Jr. School of Business Administration ( email )

Portland, OR 97203
United States

Arjun Chatrath

University of Portland - Dr. Robert B. Pamplin, Jr. School of Business Administration ( email )

Portland, OR 97203
United States
503-283-7465 (Phone)

Joseph Macri

Macquarie University - Department of Economics ( email )

Sydney NSW 2109
Australia
61-2-9850-9469 (Phone)
61-2-9850-8586 (Fax)

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Kambiz Raffiee

University of Nevada, Reno - College of Business Administration - Department of Economics ( email )

1664 N. Virginia Street
Reno, NV 89557
United States

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