Shock and volatility spillovers between oil and emerging seven stock markets

Abstract

Purpose

This study aims to examine the volatility spillover effects between oil and stock returns in the emerging seven economies.

Design/methodology/approach

In this study, the Granger causality test and vector autoregression-generalized autoregressive conditional heteroskedasticity approach to analyze the volatility spillover from 1995 to 2019 were used. The findings provide evidence of significant volatility spillover between oil and Brazil, China, India, Indonesia, Mexico, Russia and Turkey (E7) stock markets.

Findings

All emerging seven stock markets exhibit positive and low constant conditional correlations with oil assets. The magnitude of the correlation changes in respond to the country’s net position in the crude oil market. While a relatively high level of correlation exists between oil and the stock markets of net oil-exporting countries, a relatively low level of correlation exists between oil and the stock markets of net oil-importing countries.

Originality/value

The findings suggest that oil asset improves the risk-adjusted performance of a well-diversified portfolio of stocks. However, investors should invest a larger portion of their portfolios in E7 stock markets than in oil.

Citation

Khurshid, M. and Kirkulak-Uludag, B. (2021), "Shock and volatility spillovers between oil and emerging seven stock markets", International Journal of Energy Sector Management, Vol. 15 No. 5, pp. 933-948. https://doi.org/10.1108/IJESM-02-2020-0014