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Crude oil and world stock markets: volatility spillovers, dynamic correlations, and hedging

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  • Yudong Wang

    (Nanjing University of Science and Technology)

  • Li Liu

    (Nanjing Audit University)

Abstract

In this paper, we investigate volatility spillovers and dynamic correlations between crude oil and stock markets using GARCH-class models. We focus on the dynamic relationships of seven major oil-exporting countries and nine oil-importing countries. Our main findings based on in-sample and out-of-sample evidence suggest that the volatility spillovers and dynamic correlations between global crude oil market and a country’s stock market depend on the net position of oil imports and exports of this country in the world market. In addition, crude oil risk can be better hedged by investing in stocks of oil-exporting countries than in those of oil-importing countries.

Suggested Citation

  • Yudong Wang & Li Liu, 2016. "Crude oil and world stock markets: volatility spillovers, dynamic correlations, and hedging," Empirical Economics, Springer, vol. 50(4), pages 1481-1509, June.
    • Handle: RePEc:spr:empeco:v:50:y:2016:i:4:d:10.1007_s00181-015-0983-2
    DOI: 10.1007/s00181-015-0983-2
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    More about this item

    Keywords

    Crude oil price; Stock prices; Volatility; Hedging; Out of sample;
    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
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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