Time-Varying Linkage between Equities and Oil

Date

2020-01-01

Author

Ordu Akkaya, Beyza Mina
Oran, Adil
Soytaş, Uğur

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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This study examines the correlation structures between oil futures, the S&P 500 and US sectoral indices, using the Asymmetric DCC method. The results indicate that these correlations display time-varying and asymmetric characteristics. The potential effects of variousfactors, including copper and gold prices, dollar/euro exchange rate, T-bill rate and financial stress index on these dynamic correlations are also investigated. The dynamic links betweenoil and stock returns weaken in response to shocks in all factors we examine,except for financial stress index and short-term interest rates. Similar to previous studies, we find that during financial distress episodes, correlationstend to strengthen. Furthermore, we are interested in whether the increases incorrelations are temporary or persistent in nature, as this would contain important information for hedging strategies. The findings indicate that prior to the 2008 global financial crisis, the increases were more temporary in nature, whereas after this crisisthey display more persistent behavior. We find that the Cleveland FinancialStress Index (CFSI) captures a long-term increase in correlations, since anincrease in the CFSI post-2008 leads to a surge in correlations, but not inpre-2008. Hence, investors should definitely follow CFSI to gain benefits of diversification in commoditymarkets.

URI

https://doi.org/10.1142/9789811210242_0004
https://hdl.handle.net/11511/91525

Relation

Risk Factors and Contagion in Commodity Markets and Stocks Markets

Collections

Department of Business Administration, Book / Book chapter

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Citation Formats

B. M. Ordu Akkaya, A. Oran, and U. Soytaş, Time-Varying Linkage between Equities and Oil. 2020.