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VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES

Year 2023, Volume: 23 Issue: 1, 127 - 144, 23.01.2023

Ahmet Galip Gençyürek Ramazan Ekinci Büşra Ağan

https://doi.org/10.21121/eab.793854

Abstract

The study aims to analyze volatility spillover between the oil market (WTI) and S&P Energy, Financial, and Industry sector indices in terms of conditional correlation and variance causality. DCC-GARCH and Hafner-Herwartz (2006) Variance Causality Analysis were used to analyze the daily data span from January 2012 to December 2019. As a conclusion, in this study has been revealed that there is a positive time-varying conditional correlation between the oil market and sector indices. Besides, hedge ratio and risk minimizing portfolio weights, which are vital for investors, have been calculated based on these data. The cheapest hedging transaction with the oil market occurs with the financial sector, the most expensive one takes place with the energy sector. Also, it has been determined that volatility transmission is from sector indices to the oil market. This situation means that, S&P sector indices play a key role (resource of information- emit information) in volatility spillover. The results provide important information to researches, investors and policy-makers.

Çalışmanın amacı, petrol piyasası (WTI) ile S&P Enerji, Finansal ve Sanayi sektör endeksleri arasındaki ilişkiyi koşullu korelasyon ve varyans nedenselliği bakımından incelemektir. DCC-GARCH ve and Hafner-Herwartz (2006) Varyans Nedensellik modelleri Ocak 2012-Aralık 2019 dönemi günlük verilerini analiz etmek için kullanılmıştır. Çalışma sonucunda petrol piyasası ile sektör endeksleri arasında zamana bağlı değişim gösteren pozitif koşullu korelasyon ilişkisi olduğu belirlenmiştir. İlaveten, elde edilen sonuçlardan yararlanarak yatırımcılar açısından oldukça önemli olan korunma rasyosu ve riski minimize eden portföy ağırlıkları hesaplanmıştır. Petrol piyasası ile en ucuz korunma işlemi finans sektörüyle, en pahalı korunma işlemi ise; enerji sektörüyle olmuştur. Bunun yanında, volatilite iletiminin sektör endekslerinden petrol piyasasına doğru olduğu belirlenmiştir. Bu durum S&P sektör endekslerinin volatilite yayılımında önemli bir role sahip (bilginin kaynağı, bilgi yayan) olduğunu göstermektedir. Elde edilen sonuçlar araştırmacılar, yatırımcılar ve politika yapıcılar açısından önemli bilgiler sunmaktadır.

Keywords

Oil Market Sector Indıces Multivariate Garch Variance Causality Spillover

References

  • Arouri, M. E.H., Jouni, J. and Nguyen, D. K. (2011). Volatility Spillovers Between Oil Prices and Stock Sector Returns: Implications for Portfolio Management. Journal of International Money and Fınance, 30, 1387-1405.
  • Ashfaq, S., Tang, Y. and Maqbool, R. (2019). Volatility Spillover Impact of World Oil Prices on Leading Asian Energy Exporting and Importing Economies Stock Returns. Energy, 188, 1-13.
  • Basher S.A. and Sadorsky, P. (2006). Oil Price Risk and Emerging Stock Markets. Global Finance Journal, 17, 224-251.
  • Baur, D.G. and Lucey, B.M., (2010). Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold. The Financial Review,45,217-229.
  • Baur, D.G., and McDermott, T.K. (2010). Is Gold A Safe Haven? International Evidence. Journal of Banking & Finance,34,1886-1898.
  • Belhassine, O. (2020). Volatility Spillovers and Hedging Effectiveness Between the Oil Market and Eurozone Sectors: A Tale of Two Crises. Research in International Business and Finance, 53, 1-19.
  • Brown S.P.A. and Yücel. M.K. (2002). Energy Prices and Aggregate Economic Activity: An Interpretative Survey. The Quarterly Review of Economics and Finance, 42, 193-208.
  • Çevik, E.İ., Atukeren, E . and Korkmaz, T. (2018). Oil Prices and Global Stock Markets: A Time-Varying Causality-In-Mean and Causality-in-Variance Analysis. Energies, 11, 1-22.
  • Chang, C-L., McAleer, M. and Tansuchat, R. (2013). Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Return. North American Journal of Economics and Finance, 25, 116-138.
  • Cheung, Y.W. and L.K. Ng (1996), A causality in variance test and its application to financial market prices, Journal of Econometrics, 72, 33-48.
  • Christodoulakis, G.A., and Satchell, S.E., (2002). Correlated ARCH (CorrARCH): Modelling the Time-Varying Conditional Correlation Between Financial Asset Returns. European Journal of Operational Research, 139, 351-370.
  • Creti,A., Joets,M., and Mignon, V. (2013). On The Links Between Stock And Commodity Markets' Volatility. Energy Economics, 37,16-28.
  • Domanski, D. and Heath, A. (2007). Financial Investors and Commodity Markets. BIS Quarterly Review, 53-67.
  • Engle, R. (2002). Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models. Journal of Business & Economic Statistics, 20: 3, 339-350.
  • Franke, J., Hardle, W. K. and Hafner, C. M. (2007). Statistics of Financial Markets. Berlin: Springer.
  • Hafner, C.M. and Herwartz, H. (2006). A Lagrange Multiplier Test for Causality in Variance. Economics Letters, 93, 137-141.
  • Hafner, C.M. and Herwartz, H. (2008). Testing for Causality in Variance Using Multivariate GARCH Models. Annales d'Économie et de Statistique, 89, 215-241.
  • Kalotychou, E. and Staikouras, S.K. (2009). An Overview of the Issues Surrounding Stock Market Volatility, Stock Market Volatility, Edt by. Gregoriou, G. N. 3-29. Chapman&Hall:NY
  • Kroner, K. F. and Sultan, J. (1993). Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures. The Journal of Financial and Quantitative Analysis, 28: 4, 535-551.
  • Kroner, K.F. and Ng, V.K., (1998). Modeling Asymmetric Movements of Asset Prices. Review of Financial Studies,.11, 817–844.
  • Liu, X., An, H.,Huang,S. and Wen, S. (2017). The Evolution Of Spillover Effects Between Oil And Stock Markets Across Multi-Scales Using A Wavelet-Based GARCH–BEKK Model. Physica A: Statistical Mechanics and its Applications, 465, 374-383.
  • Liu, Z., Tseng, H-K.,Wu, J.S. and Ding, Z. (2020). Implied Volatility Relationships Between Crude Oil and The U.S. Stock Markets: Dynamic Correlation and Spillover Effects. Resources Policy,.66, 1-10.
  • Maghyereh, A.I., Awartani, B. and Bouri, E. (2016). The Directional Volatility Connectedness Between Crude Oil and Equity Markets: New Evidence from Implied Volatility Indexes. Energy Economics, 57, 78-93.
  • Malik, F. and Ewing, B.T. (2009). Volatility Transmission Between Oil Prices and Equity Sector Returns. International Review of Financial Analysis, 18, 95-100.
  • Malik, F. and Hammoudeh, S. (2007). Shock and Volatility Transmission in The Oil, US and Gulf Equity Markets. International Review of Economics and Finance, 16, 357-368.
  • Mensi, W., Beljid, M., Boubaker, A. and Managi, S. (2013). Correlations and Volatility Spillovers Across Commodity and Stock Markets: Linking Energies, Food, And Gold. Economic Modelling, 32, 15-22.
  • Mollick, A. V. and Assefa, T. A. (2013). U.S. Stock Returns and Oil Prices: The Tale from Daily Data and The 2008–2009 Financial Crisis. Energy Economics, 36, 1-18.
  • Nazlıoğlu, S., Hammoudeh, S. and Gupta, R. (2015). Volatility Transmission Between Islamic and Conventional Equity Markets: Evidence from Causality in-Variance Test. Applied Economics, 1-15.
  • Pindyck, R. S. (1980). Energy Price Increases and Macroeconomic Policy. The Energy Journal, 1: 4, 1-20.
  • Sarwar, S., Khalfaoui, R., Waheed, R. and Dastgerdi, H.G. (2019). Volatility Spillovers and Hedging: Evidence from Asian Oil-Importing Countries. Resources Policy, 61, 479-488.
  • Singhal,S. and Ghosh, S. (2016). Returns and Volatility Linkages Between International Crude Oil Price, Metal and Other Stock Indices in India: Evidence From VAR-DCC-GARCH Models. Resources Policy, 50, 276-288.
  • Soytas, U. and Oran, A. (2011). Volatility Spillover from World Oil Spot Markets to Aggregate and Electricity Stock Index Returns in Turkey. Applied Energy, 88, 354-360.
  • Tse, Y.K., and Tsui, A. K. C. (2002). A Multivariate Generalized Autoregressive Conditional Heteroscedasticity Model with Time Varying Correlations. Journal of Business & Economic Statistics. 20: 3, 351-362.
  • Wang,Y. and Liu, L. (2016). Crude Oil and World Stock Markets: Volatility Spillovers, Dynamic Correlations, And Hedging. Empir Econ, 50, 1481-1509.
  • Zivot, E. and Andrews, D. (1992). Further Evidence of Great Crash, the Oil Price Shock and Unit Root Hypothesis, Journal of Business and Economic Statistics, 10, 251-

Year 2023, Volume: 23 Issue: 1, 127 - 144, 23.01.2023

Ahmet Galip Gençyürek Ramazan Ekinci Büşra Ağan

https://doi.org/10.21121/eab.793854

Abstract

References

  • Arouri, M. E.H., Jouni, J. and Nguyen, D. K. (2011). Volatility Spillovers Between Oil Prices and Stock Sector Returns: Implications for Portfolio Management. Journal of International Money and Fınance, 30, 1387-1405.
  • Ashfaq, S., Tang, Y. and Maqbool, R. (2019). Volatility Spillover Impact of World Oil Prices on Leading Asian Energy Exporting and Importing Economies Stock Returns. Energy, 188, 1-13.
  • Basher S.A. and Sadorsky, P. (2006). Oil Price Risk and Emerging Stock Markets. Global Finance Journal, 17, 224-251.
  • Baur, D.G. and Lucey, B.M., (2010). Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold. The Financial Review,45,217-229.
  • Baur, D.G., and McDermott, T.K. (2010). Is Gold A Safe Haven? International Evidence. Journal of Banking & Finance,34,1886-1898.
  • Belhassine, O. (2020). Volatility Spillovers and Hedging Effectiveness Between the Oil Market and Eurozone Sectors: A Tale of Two Crises. Research in International Business and Finance, 53, 1-19.
  • Brown S.P.A. and Yücel. M.K. (2002). Energy Prices and Aggregate Economic Activity: An Interpretative Survey. The Quarterly Review of Economics and Finance, 42, 193-208.
  • Çevik, E.İ., Atukeren, E . and Korkmaz, T. (2018). Oil Prices and Global Stock Markets: A Time-Varying Causality-In-Mean and Causality-in-Variance Analysis. Energies, 11, 1-22.
  • Chang, C-L., McAleer, M. and Tansuchat, R. (2013). Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Return. North American Journal of Economics and Finance, 25, 116-138.
  • Cheung, Y.W. and L.K. Ng (1996), A causality in variance test and its application to financial market prices, Journal of Econometrics, 72, 33-48.
  • Christodoulakis, G.A., and Satchell, S.E., (2002). Correlated ARCH (CorrARCH): Modelling the Time-Varying Conditional Correlation Between Financial Asset Returns. European Journal of Operational Research, 139, 351-370.
  • Creti,A., Joets,M., and Mignon, V. (2013). On The Links Between Stock And Commodity Markets' Volatility. Energy Economics, 37,16-28.
  • Domanski, D. and Heath, A. (2007). Financial Investors and Commodity Markets. BIS Quarterly Review, 53-67.
  • Engle, R. (2002). Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models. Journal of Business & Economic Statistics, 20: 3, 339-350.
  • Franke, J., Hardle, W. K. and Hafner, C. M. (2007). Statistics of Financial Markets. Berlin: Springer.
  • Hafner, C.M. and Herwartz, H. (2006). A Lagrange Multiplier Test for Causality in Variance. Economics Letters, 93, 137-141.
  • Hafner, C.M. and Herwartz, H. (2008). Testing for Causality in Variance Using Multivariate GARCH Models. Annales d'Économie et de Statistique, 89, 215-241.
  • Kalotychou, E. and Staikouras, S.K. (2009). An Overview of the Issues Surrounding Stock Market Volatility, Stock Market Volatility, Edt by. Gregoriou, G. N. 3-29. Chapman&Hall:NY
  • Kroner, K. F. and Sultan, J. (1993). Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures. The Journal of Financial and Quantitative Analysis, 28: 4, 535-551.
  • Kroner, K.F. and Ng, V.K., (1998). Modeling Asymmetric Movements of Asset Prices. Review of Financial Studies,.11, 817–844.
  • Liu, X., An, H.,Huang,S. and Wen, S. (2017). The Evolution Of Spillover Effects Between Oil And Stock Markets Across Multi-Scales Using A Wavelet-Based GARCH–BEKK Model. Physica A: Statistical Mechanics and its Applications, 465, 374-383.
  • Liu, Z., Tseng, H-K.,Wu, J.S. and Ding, Z. (2020). Implied Volatility Relationships Between Crude Oil and The U.S. Stock Markets: Dynamic Correlation and Spillover Effects. Resources Policy,.66, 1-10.
  • Maghyereh, A.I., Awartani, B. and Bouri, E. (2016). The Directional Volatility Connectedness Between Crude Oil and Equity Markets: New Evidence from Implied Volatility Indexes. Energy Economics, 57, 78-93.
  • Malik, F. and Ewing, B.T. (2009). Volatility Transmission Between Oil Prices and Equity Sector Returns. International Review of Financial Analysis, 18, 95-100.
  • Malik, F. and Hammoudeh, S. (2007). Shock and Volatility Transmission in The Oil, US and Gulf Equity Markets. International Review of Economics and Finance, 16, 357-368.
  • Mensi, W., Beljid, M., Boubaker, A. and Managi, S. (2013). Correlations and Volatility Spillovers Across Commodity and Stock Markets: Linking Energies, Food, And Gold. Economic Modelling, 32, 15-22.
  • Mollick, A. V. and Assefa, T. A. (2013). U.S. Stock Returns and Oil Prices: The Tale from Daily Data and The 2008–2009 Financial Crisis. Energy Economics, 36, 1-18.
  • Nazlıoğlu, S., Hammoudeh, S. and Gupta, R. (2015). Volatility Transmission Between Islamic and Conventional Equity Markets: Evidence from Causality in-Variance Test. Applied Economics, 1-15.
  • Pindyck, R. S. (1980). Energy Price Increases and Macroeconomic Policy. The Energy Journal, 1: 4, 1-20.
  • Sarwar, S., Khalfaoui, R., Waheed, R. and Dastgerdi, H.G. (2019). Volatility Spillovers and Hedging: Evidence from Asian Oil-Importing Countries. Resources Policy, 61, 479-488.
  • Singhal,S. and Ghosh, S. (2016). Returns and Volatility Linkages Between International Crude Oil Price, Metal and Other Stock Indices in India: Evidence From VAR-DCC-GARCH Models. Resources Policy, 50, 276-288.
  • Soytas, U. and Oran, A. (2011). Volatility Spillover from World Oil Spot Markets to Aggregate and Electricity Stock Index Returns in Turkey. Applied Energy, 88, 354-360.
  • Tse, Y.K., and Tsui, A. K. C. (2002). A Multivariate Generalized Autoregressive Conditional Heteroscedasticity Model with Time Varying Correlations. Journal of Business & Economic Statistics. 20: 3, 351-362.
  • Wang,Y. and Liu, L. (2016). Crude Oil and World Stock Markets: Volatility Spillovers, Dynamic Correlations, And Hedging. Empir Econ, 50, 1481-1509.
  • Zivot, E. and Andrews, D. (1992). Further Evidence of Great Crash, the Oil Price Shock and Unit Root Hypothesis, Journal of Business and Economic Statistics, 10, 251-
There are 35 citations in total.

Details

Primary Language English
Subjects Business Administration
Journal Section Research Article
Authors

Ahmet Galip Gençyürek 0000-0002-5842-7942

Ramazan Ekinci 0000-0001-7420-9841

Büşra Ağan 0000-0003-1485-9142

Publication Date January 23, 2023
Acceptance Date November 21, 2022
Published in Issue Year 2023 Volume: 23 Issue: 1

Cite

APA Gençyürek, A. G., Ekinci, R., & Ağan, B. (2023). VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES. Ege Academic Review, 23(1), 127-144. https://doi.org/10.21121/eab.793854
AMA Gençyürek AG, Ekinci R, Ağan B. VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES. ear. January 2023;23(1):127-144. doi:10.21121/eab.793854
Chicago Gençyürek, Ahmet Galip, Ramazan Ekinci, and Büşra Ağan. “VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES”. Ege Academic Review 23, no. 1 (January 2023): 127-44. https://doi.org/10.21121/eab.793854.
EndNote Gençyürek AG, Ekinci R, Ağan B (January 1, 2023) VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES. Ege Academic Review 23 1 127–144.
IEEE A. G. Gençyürek, R. Ekinci, and B. Ağan, “VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES”, ear, vol. 23, no. 1, pp. 127–144, 2023, doi: 10.21121/eab.793854.
ISNAD Gençyürek, Ahmet Galip et al. “VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES”. Ege Academic Review 23/1 (January 2023), 127-144. https://doi.org/10.21121/eab.793854.
JAMA Gençyürek AG, Ekinci R, Ağan B. VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES. ear. 2023;23:127–144.
MLA Gençyürek, Ahmet Galip et al. “VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES”. Ege Academic Review, vol. 23, no. 1, 2023, pp. 127-44, doi:10.21121/eab.793854.
Vancouver Gençyürek AG, Ekinci R, Ağan B. VOLATILITY SPILLOVER, HEDGING AND PORTFOLIO DIVERSIFICATION BETWEEN OIL MARKET AND S&P SECTORAL INDICES. ear. 2023;23(1):127-44.
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