Volatility spillovers between oil prices and the stock market under structural breaks |
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| Institution: | 1. Rawls College of Business, Texas Tech University, Lubbock, TX 79409-2101, United States;2. College of Business, Zayed University, P. O. Box 19282, Dubai, United Arab Emirates;1. Department of Economic and Regional Development, Panteion University, 136 Syngrou Av., Athens 176 71, Greece;2. Department of Business Administration, Hellenic Open University, Aristotelous 18, Patra 26 335, Greece;3. Department of Accounting and Finance, Technological Educational Institute of Crete, Iraklio 71 004, Greece;1. Department of Finance, California State University, Long Beach, CA 90840, USA;2. Department of Finance and Real Estate, Colorado State University, Fort Collins, CO 80523, USA;3. Department of Finance, Dolan School of Business, Fairfield University, 1073 North Benson Road, Fairfield, CT 06824, USA;1. Rutgers School of Business-Camden, Rutgers University, Camden, NJ 08003, United States;2. City College of the City University of New York, New York, NY 10031, United States;1. IHEC of Sousse, B.P. 40, Route de la ceinture-Sahloul III, 4054 Sousse, Tunisia;2. IPAG LAB, IPAG Business School, 184, boulevard Saint-Germain, Paris 75006, France;3. Department of Business Administration, IQRA University, Karachi 75300, Pakistan |
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| Abstract: | This paper employs univariate and bivariate GARCH models to examine the volatility of oil prices and US stock market prices incorporating structural breaks using daily data from July 1, 1996 to June 30, 2013. We endogenously detect structural breaks using an iterated algorithm and incorporate this information in GARCH models to correctly estimate the volatility dynamics. We find no volatility spillover between oil prices and US stock market when structural breaks in variance are ignored in the model. However, after accounting for structural breaks in the model, we find strong volatility spillover between the two markets. We compute optimal portfolio weights and dynamic risk minimizing hedge ratios to highlight the significance of our empirical results which underscores the serious consequences of ignoring these structural breaks. Our findings are consistent with the notion of cross-market hedging and sharing of common information by financial market participants in these markets. |
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