Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2016-07-18
Number: 16-053/III
Author-Name: Chia-Lin Chang
Author-Workplace-Name: National Chung Hsing University, Taiwan
Author-Name: Michael McAleer
Author-Workplace-Name: National Tsing Hua University, Taiwan; Erasmus University Rotterdam, The Netherlands; Complutense University of Madrid, Spain
Author-Name: Jiarong Tian
Author-Workplace-Name: National Tsing Hua University, Taiwan
Title: Modelling and Testing Volatility Spillovers in Oil and Financial Markets for USA, UK and China
Abstract: The primary purpose of the paper is to analyze the conditional correlations, conditional covariances, and co-volatility spillovers between international crude oil and associated financial markets. The paper investigates co-volatility spillovers (namely, the delayed effect of a returns shock in one physical or financial asset on the subsequent volatility or co-volatility in another physical or financial asset) between the oil and financial markets. The oil industry has four major regions, namely North Sea, USA, Middle East, and South-East Asia. Associated with these regions are two major financial centers, namely UK and USA. For these reasons, the data to be used are the returns on alternative crude oil markets, returns on crude oil derivatives, specifically futures, and stock index returns in UK and USA. The paper will also analyze the Chinese financial markets, where the data are more recent. The empirical analysis will be based on the diagonal BEKK model, from which the conditional covariances will be used for testing co-volatility spillovers, and policy recommendations. Based on these results, dynamic hedging strategies will be suggested to analyze market fluctuations in crude oil prices and associated financial markets.
Classification-JEL: C58, D53, G13, G31, O13
Keywords: Co-volatility spillovers, crude oil, financial markets, spot, futures, diagonal BEKK, optimal dynamic hedging
File-Url: https://papers.tinbergen.nl/16053.pdf
File-Format: application/pdf
File-Size: 563502 bytes
Handle: RePEc:tin:wpaper:20160053