The Time-Varying Correlation between Crude oil Future and USA Bond Markets During 2005-2020: Evidence from a DCC-GARCH Model

Abstract

In this paper, we examine potential time-varying correlations between crude oil future and USA bond markets. We employ a dynamic conditional correlation (DCC) multivariate GARCH model in order to quantify potential contagion effects between the markets for the period 2005-2020. We divide the period in two sub-period to make the empirical analysis easier. Empirical results reveal increased conditional correlation in the first sub-period (2005-2012) and no contagion in the second sub-period (2012-2020). Results are of interest to investors, who invest long-term into the under investigation financial markets, as well as, to policymakers, who provide regulations for the under investigation derivate market.

Keywords: DCC-GARCH, Crude oil future market, USA bond market, financial contagion, dynamic conditional correlations

JEL Classification: C58, C61, G10