Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries

The paper investigates the time-varying correlation between stock market prices and oil prices for oil-importing and oil-exporting countries. A DCC-GARCH-GJR approach is employed to test the above hypothesis based on data from six countries; Oil-exporting: Canada, Mexico, Brazil and Oil-importing: USA, Germany, Netherlands. The contemporaneous correlation results show that i) although time-varying correlation does not differ for oil-importing and oil-exporting economies, ii) the correlation increases positively (negatively) in respond to important aggregate demand-side (precautionary demand) oil price shocks, which are caused due to global business cycle’s fluctuations or world turmoil (i.e. wars). Supply-side oil price shocks do not influence the relationship of the two markets. The lagged correlation results show that oil prices exercise a negative effect in all stock markets, regardless the origin of the oil price shock. The only exception is the 2008 global financial crisis where the lagged oil prices exhibit a positive correlation with stock markets. Finally, we conclude that in periods of significant economic turmoil the oil market is not a safe haven for offering protection against stock market losses

Economic announcements and the 10-year U.S. Treasury: Surprising findings without the surprise component.

In the current study we identify the announcements that trigger substantial changes in the behavior of the 10-year US Treasury market, without using the surprise component and, therefore, expectational data. We use a novel model-free approach based on extreme market movements related to price returns, volatility and traded volumes. Our findings corroborate those of previous studies, which were based on expectational data. More importantly, though, we identify two additional announcements (Oil Inventories and the Mortgage Applications), which have not been previously reported. These findings are primarily important to financial analysts and investors

The effects of oil price shocks on stock market volatility: Evidence from European data

The paper investigates the effects of oil price shocks on stock market volatility in Europe by focusing on three measures of volatility, i.e. the conditional, the realized and the implied volatility. The findings suggest that supply-side shocks and oil specific demand shocks do not affect volatility, whereas, oil price changes due to aggregate demand shocks lead to a reduction in stock market volatility. More specifically, the aggregate demand oil price shocks have a significant explanatory power on both current-and forward-looking volatilities. The results are qualitatively similar for the aggregate stock market volatility and the industrial sectors' volatilities. Finally, a robustness exercise using short-and long-run volatility models supports the findings

Business cycle synchronisation in EU: a time-varying approach

The paper investigates the time -varying correlation between the EU12 -wide business cycle and the initial EU12 member -countries based on scalar -BEKK and multivariate Riskmetrics model frameworks for the period 1980-2009. The paper provides evidence that changes in the business cycle synchronisation correspond to institutional changes that have taken place at a European level.Business cycle synchronisation has moved in a direction positive for the operation of a single currency suggesting that the common monetary policy is less costly in terms of lost flexibility at the national level. Thus,any questions regarding the optimality and sustainability of the common currency area in Europe should not be attributed to the lack of cyclical synchronisation

Investments and uncertainty revisited: The case of the US economy.

This paper examines the relationship between investments and uncertainty for the US economy, as the latter is approximated by consumer sentiment, purchasing managers’ prospects and economic policy uncertainty. Contrary to the existing literature, we provide evidence that this relationship is time-varying. The time variation is attributed to the observed temporal replacement effect between private and public investments. Furthermore, we show that there are two distinct correlation regimes in this relationship and unless we concentrate on them, we cannot fully unravel the real link between uncertainty and investments. Finally, we examine whether the use of the two correlation regimes provides better forecasts for investments compared to the use of the uncertainty indices alone. The forecasting exercise reveals that the use of correlation regimes provides statistically superior out of-sample forecasts

Oil and currency volatilities: Co-movements and hedging opportunities

The current literature concentrates its attention to the interactions between oil and exchange rates, focusing only on the first moments. Extending this line of research, we investigate the time-varying correlation between the volatilities of two oil benchmarks (Brent and WTI) and six currencies of the major oil-importers and oil-exporters, for the period from February 1, 1999 to May 30, 2016, using a Diag-BEKK model. The optimal portfolio weights and hedge ratios for portfolios comprised of the aforementioned volatilities, are also examined. The analysis reveals that oil and currency volatilities exhibit positive correlations during major global or region-specific economic events (such as the Global Financial Crisis of 2007–2009 and the EU debt crisis period). By contrast, country-specific events yield heterogeneous time-varying correlations between oil and the different currencies in our sample. Both the optimal portfolio weights and optimal hedge ratios estimations demonstrate a time-varying behaviour, suggesting that continuous portfolio rebalancing is necessary for diversification purposes. The findings also show that risk reduction based on the optimal portfolio weight strategy is primarily beneficial for oil volatility investors, whereas currency volatility investors achieve better hedging using the optimal hedge ratio strategy

US stock market regimes and oil price shocks

The paper investigates the ability of oil price returns, oil price shocks and oil price volatility to provide predictive information on the state (high/low risk environment) of the US stock market returns and volatility. The disaggregation of oil price shocks according to their origin allows us to assess whether they contain incremental forecasting power compared to oil price returns. Overall, the results suggest that oil price returns and volatility possess the power to forecast the state of the US stock market returns and volatility. However, the full effects of oil price returns can only be revealed when the oil price shocks are disentangled and as such we claim that the oil price shocks have an incremental power in forecasting the state of the stock market. The findings are important for stock market forecasters and investors dealing with stock and derivatives market

Oil Price Shocks and Uncertainty: How stable is their relationship over time?

This paper investigates the time-varying relationship between economic/financial uncertainty and oil price shocks in the US. A structural VAR (SVAR) model and a time-varying parameter VAR (TVP-VAR) model are estimated, using six indicators that reflect economic and financial uncertainty. The findings of the study reveal that static frameworks (SVAR) do not show the full dynamics of the oil price shocks effects to the US economic/financial uncertainty. This is owing to the evidence provided by the time-varying framework (TVP-VAR), which convincingly shows that uncertainty responses to the three oil price shocks are heterogeneous both over time and over the different oil price shocks. In particular, uncertainty responses seem to experience a shift in the post global financial crisis period. Thus, the conventional findings that economic fundamentals response marginally, positively or negatively to supply-side, aggregate demand and oil specific demand shocks, respectively, do not necessarily hold at all periods. Rather, they are impacted by the prevailing economic conditions at each time period. The findings are important to policy makers and investors, as they provide new insights on the said relationships

Forecasting global stock market implied volatility indices

This study compares parametric and non-parametric techniques in terms of their forecasting power on implied volatility indices. We extend our comparisons using combined and model-averaging models. The forecasting models are applied on eight implied volatility indices of the most important stock market indices. We provide evidence that the non-parametric models of Singular Spectrum Analysis combined with Holt-Winters (SSA-HW) exhibit statistically superior predictive ability for the one and ten trading days ahead forecasting horizon. By contrast, the model-averaged forecasts based on both parametric (Autoregressive Integrated model) and non-parametric models (SSA-HW) are able to provide improved forecasts, particularly for the ten trading days ahead forecasting horizon. For robustness purposes, we build two trading strategies based on the aforementioned forecasts, which further confirm that the SSA-HW and the ARI-SSA-HW are able to generate significantly higher net daily returns in the out-of-sample period

Oil and pump prices: Testing their asymmetric relationship in a robust way

The aim of this study is to provide a novel method to assess whether retail fuel prices respond asymmetrically to changes in the international crude oil prices. To do so, we consider the whole supply chain, we use daily data and we depart from the current practice in the literature that focuses on prices. Rather, we consider the mark-ups of both the refineries and retailers. Hence, we show that we first need to assess whether the refineries' mark-up responds asymmetrically to the international crude oil prices and subsequently whether the retailers' mark-up shows an asymmetric behaviour relatively to changes in the refined fuel prices. Focusing in Greece as our case study, our findings show that Greek fuel retailers do not change their mark-up behaviour based on changes of the refined fuel price. By contrast, the asymmetric behaviour is evident in the refineries' mark-up relatively to changes in the international crude oil prices, which is then passed through to the retailers and consumers. Finally, we provide evidence that weekly and monthly data mask any such asymmetric relationship. Thus, we maintain that unless the appropriate data frequency, fuel price transformations and the whole supply chain are considered, misleading findings could be revealed