Modeling oil price–US stock nexus: A VARMA–BEKK–AGARCH approach

This study adds to the existing literature on oil price–US stock nexus in three ways. First, it employs the VARMA–AGARCH model developed by McAleer et al. (2009) within the context of BEKK framework using West Texas Intermediate (WTI) and Brent as proxies for oil market and S&P stocks as a proxy...

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Bibliographic Details
Published in:Energy economics 2015-07, Vol.50, p.1-12
Main Authors: Salisu, Afees A., Oloko, Tirimisiyu F.
Format: Article
Language:English
Subjects:
Asymmetric effect
Crude oil prices
Energy economics
Hedging
Markets
Oil price
Portfolio management
Prices
S&P stocks
Securities markets
Spillover effect
Stochastic models
Stock exchanges
Stock market
Stocks
Studies
Texas
United States
VARMA–BEKK–AGARCH
Volatility
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Summary:This study adds to the existing literature on oil price–US stock nexus in three ways. First, it employs the VARMA–AGARCH model developed by McAleer et al. (2009) within the context of BEKK framework using West Texas Intermediate (WTI) and Brent as proxies for oil market and S&P stocks as a proxy for US stock market. Secondly, it modifies the model to include endogenously determined structural break using the general structure for analyzing breaks with unit roots in Perron (2006). Third, it uses the adopted model to compute optimal portfolio weight and hedge ratios between oil price and US stocks using different sample data based on the break date. On average, our empirical evidence suggests a significant positive return spillover from US stock market to oil market and bi-directional shock spillovers between the two markets. In addition, there is significant own asymmetric shock effect in both markets while volatility spillover from oil market to stock market became pronounced after the break which coincides with the period of global economic slowdown. Similarly, the results of portfolio management differ across the sample data. More importantly, we find that ignoring structural break when it exists may exaggerate hedging effectiveness. •Returns, shock & volatility spillovers between oil & US stock markets are examined.•The VARMA–BEKK–AGARCH model with structural break is employed.•Significant positive return spillover from US stock market to oil market is evident.•There is evidence of own volatility, own asymmetric shocks & cross-market shocks.•Ignoring structural break when it exists may exaggerate hedging effectiveness.
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2015.03.031