Crude oil price volatility spillovers into major equity markets

Bahram Adrangi, Arjun Chatrath, Joseph Macri and Kambiz Raffiee

Abstract

ABSTRACT

This paper investigates the daily volatility spillovers between crude oil prices and equity indexes in several developed markets. We find that the price and index series exhibit nonlinear dependencies that are inconsistent with chaotic structure. Bivariate vector autoregressive general autoregressive conditional heteroscedasticity (VARGARCH) estimations indicate bidirectional volatility spillovers. Finding evidence of asymmetric market responses to negative and positive shocks, we also estimate asymmetric bivariate VAR-exponential GARCH (VAR-EGARCH) models. We find shock transmissions to be asymmetric, whereby positive and negative shocks of the same size on oil prices have unequal impacts on the volatility of equities. Specifically, volatility responses and spillovers are more severe following negative news and shocks in each market. We further establish that there are causalities and feedback between crude oil prices and equity indexes in major developed economies. Considering the deleterious income and wealth effects of negative shocks to oil prices on the economies under study, our findings are in contrast to the notion that some economies are better able to weather negative shocks to the crude oil markets because of their increased efficiency or flexibility. Furthermore, maintaining adequate strategic crude oil reserves in the United States and other major economies is paramount in coping with shocks to crude oil supplies and price volatility.