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Connectedness between oil price shocks and US sector returns: Evidence from TVP-VAR and wavelet decomposition

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  • Sevillano, María Caridad
  • Jareño, Francisco
  • López, Raquel
  • Esparcia, Carlos

Abstract

This paper examines the dynamic return and volatility connectedness between oil price shocks (demand, supply, and risk shocks) and US sector returns from October 2001 to January 2022. For this purpose, we combine the decomposition of the time series in time scales through the wavelet approach with the application of the TVP-VAR model proposed by Antonakakis et al. (2020). Our results show the high dynamic connectedness between markets and allow the identification of the role of all sector indices (except Communication Services, Utilities and Real Estate) and risk shocks as net contributors of shocks to the system, whereas demand and supply shocks are net receivers of spillovers. We further explore and document from a portfolio performance perspective the benefits of diversified portfolios comprised of all consider sector indices that include assets linked to the calculation of oil price shocks according to Ready (2018).

Suggested Citation

  • Sevillano, María Caridad & Jareño, Francisco & López, Raquel & Esparcia, Carlos, 2024. "Connectedness between oil price shocks and US sector returns: Evidence from TVP-VAR and wavelet decomposition," Energy Economics, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:eneeco:v:131:y:2024:i:c:s0140988324001063
    DOI: 10.1016/j.eneco.2024.107398
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    More about this item

    Keywords

    Crude oil prices; US sector returns; Connectedness; Wavelets; Portfolio;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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