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    Oil price effect on sectoral stock returns: A conditional covariance and correlation approach for Mexico

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    Efecto del precio del petr贸leo en las rentabilidades de las acciones sectoriales: Un enfoque condicional de covarianza y correlaci贸n para M茅xicoEste trabajo analiza la relaci贸n entre la volatilidad del precio del petr贸leo y rendimientos burs谩tiles sectoriales seleccionados en M茅xico (Industrial, materiales, financiero y de consumo discrecional) a trav茅s de la implementaci贸n de un modelo GARCH bivariado tipo VECH Diagonal para estimar sus covarianzas y correlaciones condicionales. El hallazgo m谩s importante es que existe una relaci贸n estad铆stica significativa entre los 铆ndices sectoriales y las variaciones en el precio del petr贸leo. Las correlaciones condicionales sugieren que durante la mayor parte del periodo del an谩lisis la relaci贸n entre el precio del petr贸leo y los rendimientos sectoriales es positiva. La recomendaci贸n apoyada por los resultados descritos es que los inversionistas deben tomar en cuenta la interacci贸n mencionada para generar coberturas de riesgo m谩s robustas. Dentro de las limitantes de la investigaci贸n, se encuentra la escasez de informaci贸n a nivel sector en el mercado burs谩til del pa铆s. La aportaci贸n original de este estudio radica en el an谩lisis con enfoque sectorial. Los resultados apoyan a la corriente que sugiere que las fluctuaciones en el precio del petr贸leo tienen un efecto directo en el mercado burs谩til.This paper analyzes the relationship between the volatility of oil price and selected sectoral stock returns in Mexico (industrials, materials, financials and consumer discretionary) by implementing a Diagonal VECH-type bivariate GARCH model in order to estimate conditional covariances and correlations. The econometric results suggest that there exists a statistically significant relationship between sector indices, as well as between Mexico鈥檚 aggregate stock exchange returns, and variations in oil prices. Conditional correlations suggest that during most of the analyzed period, the relationship between oil price fluctuations and sectoral stock returns is positive. The recommendation, supported by these results, is that investors should take into consideration the interaction between the analyzed variables in order to generate more robust risk-hedge strategies. An important limitation for this work is information availability at sector level in the country. The original contribution of this paper lies mainly in the analysis of the influence of oil prices over sectoral indices of the Mexican Stock Exchange. These results provide more support to the current that suggests that a price increase in oil has a direct spillover effect on stock market performance
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