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A time-varying copula approach to oil and stock market dependence: The case of transition economies

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  • Aloui, Riadh
  • Hammoudeh, Shawkat
  • Nguyen, Duc Khuong

Abstract

We employ the time-varying copula approach to investigate the conditional dependence between the Brent crude oil price and stock markets in the Central and Eastern European (CEE) transition economies. Our results show evidence of a positive dependence between the oil and the stock markets of the six CEE countries, which is indicative of a contagion between those markets, regardless of the changes in the oil price or the CEE stock index. Moreover, the dependence patterns in both the center and left tails of the return distributions change over time, particularly during the heart of the financial crisis, and are best described by the Survival Gumbel copulas. The empirical evidence also suggests that the lower tail dependence is much stronger than that of the upper tail, highlighting the importance of contagion during severe contractionary business cycles. Among the sample markets, Poland is shown to be particularly sensitive in this regard, while Hungary and Slovenia are the least sensitive.

Suggested Citation

  • Aloui, Riadh & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2013. "A time-varying copula approach to oil and stock market dependence: The case of transition economies," Energy Economics, Elsevier, vol. 39(C), pages 208-221.
    • Handle: RePEc:eee:eneeco:v:39:y:2013:i:c:p:208-221
    DOI: 10.1016/j.eneco.2013.04.012
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    More about this item

    Keywords

    Copulas; Oil prices; Stock markets; Transition economies;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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