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

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  • Salisu, Afees A.
  • Oloko, Tirimisiyu F.
Abstract
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.

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  • Salisu, Afees A. & Oloko, Tirimisiyu F., 2015. "Modeling oil price–US stock nexus: A VARMA–BEKK–AGARCH approach," Energy Economics, Elsevier, vol. 50(C), pages 1-12.
    • Handle: RePEc:eee:eneeco:v:50:y:2015:i:c:p:1-12
    DOI: 10.1016/j.eneco.2015.03.031
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    More about this item

    Keywords

    Oil price; S&P stocks; VARMA–BEKK–AGARCH; Spillover effect; Asymmetric effect; Portfolio management;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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