Time-Varying Linkage between Equities and Oil

Date

2020-05-01

Author

Ordu Akkaya, Beyza Mina
Oran, Adil
Soytaş, Uğur

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This study examines the correlation structures between oil futures, the S&P500 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 various factors, 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 between oil 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, correlations tend to strengthen. Furthermore, we are interested in whether the increases in correlations 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 crisis they display more persistent behavior. We find that the Cleveland Financial Stress Index (CFSI) captures a long-term increase in correlations, since an increase in the CFSI post-2008 leads to a surge in correlations, but not in pre-2008. Hence, investors should definitely follow CFSI to gain benefits of diversification in commodity markets.

URI

https://doi.org/10.1142/9789811210242_0004
https://hdl.handle.net/11511/91551

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.