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Volatility spillovers between oil prices and the stock market under structural breaks

Published on Feb 1, 2016in Global Finance Journal
· DOI :10.1016/j.gfj.2015.04.008
Bradley T. Ewing27
Estimated H-index: 27
(TTU: Texas Tech University),
Farooq Malik15
Estimated H-index: 15
(ZU: Zayed University)
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Abstract
This paper employs univariate and bivariate GARCH models to examine the volatility of oil prices and US stock market prices incorporating structural breaks using daily data from July 1, 1996 to June 30, 2013. We endogenously detect structural breaks using an iterated algorithm and incorporate this information in GARCH models to correctly estimate the volatility dynamics. We find no volatility spillover between oil prices and US stock market when structural breaks in variance are ignored in the model. However, after accounting for structural breaks in the model, we find strong volatility spillover between the two markets. We compute optimal portfolio weights and dynamic risk minimizing hedge ratios to highlight the significance of our empirical results which underscores the serious consequences of ignoring these structural breaks. Our findings are consistent with the notion of cross-market hedging and sharing of common information by financial market participants in these markets.
  • References (32)
  • Citations (36)
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References32
Newest
#1Bradley T. Ewing (TTU: Texas Tech University)H-Index: 27
#2Farooq Malik (USM: University of Southern Mississippi)H-Index: 15
Cited By36
Newest
#1Ghulam AbbasH-Index: 7
#2Usman Bashir (USTC: University of Science and Technology of China)H-Index: 3
Last.Muhammad Ishfaq (CUFE: Central University of Finance and Economics)H-Index: 1
view all 5 authors...
#1Mousa Tawfeeq (WVU: West Virginia University)
#2Alan R. Collins (WVU: West Virginia University)H-Index: 11
Last.Gulnara Zaynutdinova (WVU: West Virginia University)
view all 4 authors...
#1Xunxiao Wang (SUFE: Shanghai University of Finance and Economics)H-Index: 1
#2Yudong Wang (Nanjing University of Science and Technology)H-Index: 17
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