Conditional Correlations in the Returns on Oil Companies Stock Prices and Their Determinants

36 Pages Posted: 11 Jun 2004

See all articles by Matteo Manera

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS); Fondazione Eni Enrico Mattei (FEEM), Milan, Italy

Alessandro Lanza

Fondazione Eni Enrico Mattei (FEEM), Milan; CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici; Bocconi University - IEFE Centre for Research on Energy and Environmental Economics and Policy

Margherita Grasso

University College London - Department of Economics

Massimo Giovannini

Boston College - Department of Economics

Date Written: April 2004

Abstract

The identification of the forces that drive stock returns and the dynamics of their associated volatilities is a major concern in empirical economics and finance. This analysis is particularly relevant for determining optimal hedging strategies based on whether shocks to the volatilities of returns of oil companies stock prices, relevant stock market indexes and oil spot and futures prices are high or low, and positively or negatively correlated. This paper investigates the correlations of volatilities in the stock price returns and their determinants for the most important integrated oil companies, namely Bp (BP), Chevron-Texaco (CVX), Eni (ENI), Exxon-Mobil (XOM), Royal Dutch (RD) and Total-Fina Elf (TFE). We measure the actual co-risk in stock returns and their determinants "within" and "between" the different oil companies, using multivariate cointegration techniques in modelling the conditional mean, as well as multivariate GARCH models for the conditional variances. We focus first on the determinants of the market value of each company using the cointegrated VAR/VECM methodology. Then we specifiy the conditional variances of VECM residuals with the Constant Conditional Correlation (CCC) multivariate GARCH model of Bollerslev (1990) and the Dynamic Conditional Correlation (DCC) multivariate GARCH model of Engle (2002). The "within" and "between" DCC indicate low to high/extreme interdependence between the volatilities of companies' stock returns and the relevant stock market indexes or Brent oil prices.

Keywords: Constant conditional correlations, Dynamic conditional correlations, Multivariate GARCH models, Stock price indexes, Brent oil prices, Spot and futures prices, Multivariate cointegration, VECM

JEL Classification: C32, G10, Q40

Suggested Citation

Manera, Matteo and Lanza, Alessandro and Grasso, Margherita and Giovannini, Massimo, Conditional Correlations in the Returns on Oil Companies Stock Prices and Their Determinants (April 2004). FEEM Working Paper No. 71.04. Available at SSRN: https://ssrn.com/abstract=546482 or http://dx.doi.org/10.2139/ssrn.546482

Matteo Manera (Contact Author)

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS) ( email )

Via Bicocca degli Arcimboldi, 8
Milan, 20126
Italy
+39 02 6448 5819 (Phone)
+39 02 6448 5878 (Fax)

HOME PAGE: http://www.matteomanera.it

Fondazione Eni Enrico Mattei (FEEM), Milan, Italy ( email )

Corso Magenta, 63
Milan, 20123
Italy
+39 02 520 36944 (Phone)

HOME PAGE: http://www.feem.it

Alessandro Lanza

Fondazione Eni Enrico Mattei (FEEM), Milan

Corso Magenta 63
20123 Milan
Italy

CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici ( email )

via Augusto Imperatore, 16
Bologna, I-73100
Italy

Bocconi University - IEFE Centre for Research on Energy and Environmental Economics and Policy ( email )

viale Filippetti, 9
Milan, 20122
Italy

Margherita Grasso

University College London - Department of Economics ( email )

Gower Street
London
United Kingdom

Massimo Giovannini

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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