Crude oil market and stock markets during the COVID-19 pandemic: Evidence from the US,Japan, and Germany

We analyzed the return and volatility spillover between the COVID-19 pandemic in 2020, the crude oil market, and the stock market by employing two empirical methods for connectedness: the time-domain approach developed by Diebold and Yilmaz (2012) and the method based on frequency dynamics developed by Barunik and Krehlik (2018). We find that the return spillover mainly occurs in the short term; however, the volatility spillover mainly occurs in the long term. From the moving window analysis results, the impact of COVID-19 created an unprecedented level of risk, such as plummeting oil prices and triggering the US stock market circuit breaker four times, which caused investors to suffer heavy losses in a short period. Furthermore, the impact of COVID-19 on the volatility of the oil and stock markets exceeds that caused by the 2008 global financial crisis, and continues to have an effect. The impact of the COVID-19 pandemic on financial markets is uncertain in both the short and long terms. Our research provides some urgent and prominent insights to help investors and policymakers avoid the risks in the crude oil and stock markets because of the COVID-19 pandemic and reestablish economic development policy strategies.     

The impact of the COVID-19 pandemic and Russia-Ukraine war on multiscale spillovers in green finance markets: Evidence from lower and higher order moments

This study analyzes the impact of the COVID-19 pandemic and the Russia-Ukraine war on the connectedness of lower-order moments (returns and volatility) and higher-order moments (skewness and kurtosis) in the markets of green bonds, clean energy, wind, solar, and sustainability indexes. To compare the spillover effects of these moments, we use the Diebold and Yilmaz and Barunik and Krehlik methods. Our findings show that the total spillover effect of lower-order moments is higher than that of higher-order moments in the time domain. In the frequency domain, the total return and skewness spillover are primarily concentrated in the short term, whereas the total volatility spillover is mainly concentrated in the long term. Furthermore, we observe that the spillover effect of the Russia-Ukraine war on the green finance market is mild, while the COVID-19 pandemic has a significant and unprecedented influence on the spillover of both lower- and higher-order moments in this market. Additionally, we note that before the COVID-19 outbreak, the total kurtosis spillover was irregular, but it became concentrated in the long term after the outbreak. Moreover, the continuation of COVID-19 has had an unprecedented and long-lasting impact on the kurtosis and skewness of the green bond market.     

Dynamic spillovers across oil,gold and stock markets in the presence of major public health emergencies

Extreme events have a systemic impact on global financial markets, leading to significant cross-market spillovers in the oil, gold, and stock markets and raising widespread concerns about market linkages and risk contagion. In this paper, with a focus on both return and volatility, a frontier spillover network analysis is used to examine the strength and scale characteristics of spillovers in the oil, gold and stock markets under major public health emergency shocks. In addition, the paper adopts a marginal spillover and network analysis to evaluate linkage relationships, risk sources and transmission paths in the oil, gold, and stock markets during such events. The results show that the return and volatility spillover effects generated across the oil, gold, and stock markets are significant, with return spillovers being more stable and volatility spillovers being highly sensitive to emergencies. Meanwhile, the COVID-19 pandemic has displayed the strongest return and volatility spillovers. The high intensity of the shocks during the COVID-19 period has changed the usual characteristics of the market, with the gold market becoming the risk receiver and the oil market becoming risk sources.     

Comparing the impact of Chinese and U.S. economic policy uncertainty on the volatility of major global stock markets

This study compares the impact of Chinese and U.S. economic policy uncertainty (EPU) (proxied by the EPU index) on the volatility of 11 major stock markets. Unlike previous research that only utilizes monthly EPU for such a comparison, this study uses both daily and monthly data to examine the impact within a month as well as over months. In order to provide a detailed analysis, EPU shocks are investigated from a two-sided viewpoint: one considering the effects of EPU indices as exogenous shocks, and the other examining the spillovers from EPU indices as endogenous variables. Meanwhile, the role of global turmoil, such as the 2007–2008 global financial crisis (GFC) and the COVID-19 pandemic, in influencing the impact of Chinese (or U.S.) EPU is highlighted. The results show that the impact of U.S. EPU is reinforced at both daily and monthly frequencies during the GFC, with a greater effect on the European stock markets. After the GFC, the rising influence of Chinese EPU is observed at a monthly frequency in several markets in Asia and elsewhere. Overall, the dynamic spillovers from the EPU indices to stock volatility suggest the dominant role of U.S. EPU in most markets at a daily frequency, while the extent of the spillovers is driven by turbulent events, including the GFC and the COVID-19 pandemic.     

Dynamic volatility spillovers across oil and natural gas futures markets based on a time-varying spillover method

This paper analyzes dynamic volatility spillovers between four major energy commodities (i.e., crude oil, gasoline, heating oil and natural gas) in the oil-natural gas future markets. We construct a time-varying spillover method by combining the TVP-VAR-SV model and the spillover method of Diebold and Yilmaz (2009, 2012, 2014). We use the spillover method to obtain time-varying total, directional and pairwise volatility spillover indices. Our results summarize as follows: (1) The volatility spillover indices present peaks and troughs during some periods, such as shale gas revolution, financial crisis, and oil price crash; (2) After the U.S. shale gas revolution, the size of volatility spillover from natural gas future market has reduced sharply, but volatility doesn't decouple from the other three oil future markets; (3) The directional spillover is asymmetric. The crude oil and heating oil futures market are main net transmitter of volatility risk information, while the gasoline and natural gas futures markets are the net receiver; (4) For natural gas future market, the pairwise volatility spillover from crude oil future market has the most significant influence.     

COVID-19 and time-frequency connectedness between green and conventional financial markets

Against the backdrop of the exponentially growing trend in green finance investments and the calls for green recovery in the post-COVID world, this study presents the time-frequency connectedness between green and conventional financial markets by using the spillover models of Diebold and Yilmaz (2012) and Baruník and Křehlík (2018). Covering a sample period from January 01, 2008, to July 31, 2020, we aim to explore the dynamics of connectedness between conventional and green investments in fixed income, equity, and energy markets. Additionally, we determine the role of market-wide uncertainty in altering the connectedness structure by performing a subsample analysis for the ongoing COVID-19 pandemic crisis period. Our results show that competing energy investments are not connected, and there is only one-way spillovers from the conventional bonds in the fixed-income investments. Additionally, we observe a low (high) intergroup connectedness for conventional (green) investments. Moreover, the frequency-based analysis shows that connectedness between these competing markets is more pronounced during the short-run. The subsample analysis for the pandemic crisis period shows similar results except for the disconnection between bond markets in the short-run frequency. Our time-varying analysis shows peaks and troughs in the connectedness between climate-friendly and conventional investments that suggest different global events such as the Eurozone Debt Crisis and Shale Oil Revolution drives the association between alternate investments. Similarly, we observe an enhanced connectedness during the recent COVID-19 period, suggesting that financial stability would be a significant factor in determining the smooth transition to green investments.     

Dynamic connectedness and optimal hedging strategy among commodities and financial indices

This study looks at the best portfolio strategy for mitigating the risk associated with the MSCI ACWI & Frontier Markets Index, as well as the volatility spillovers between commodity markets and certain financial markets. Therefore, we empirically explore the connectedness among three financial indicators and five product groups using the framework of Diebold and Yilmaz (2012), which is based on a vector autoregressive process and variance decomposition of prediction errors, between 31 May 2002 and 30 July 2021. We also investigate the best hedging instrument(s) for the MSCI ACWI & Frontier Markets Global Index by combining the Asymmetric Dynamic Conditional Correlation (ADCC) model with the risk reduction index and the hedging ratios. Our empirical findings highlight the importance of volatility spillover effects across financial markets, which is not the case for commodity markets with low volatility externalities. Furthermore, the first markets appear to be net transmitters of volatility, whereas the second markets appear to be net receivers. Using the approach of Kroner and Sultan (1993), we show that the least risk portfolio is a portfolio that combines the MSCI ACWI & Frontier Markets Global Index with financial indices related to socially responsible and irresponsible investing.     

Volatility spillovers between WTI and Brent spot crude oil prices: an analysis of granger causality in variance patterns over time

There has been an increase in price volatility in oil prices during and since the global financial crisis (GFC). This study investigates the Granger causality patterns in volatility spillovers between West Texas International (WTI) and Brent crude oil spot prices using daily data. We use Hafner and Herwartz’s (2006) test and employ a rolling sample approach to investigate the changes in the dynamics of volatility spillovers between WTI and Brent oil prices over time. Volatility spillovers from Brent to WTI prices are found to be more pronounced at the beginning of the analysis period, around the GFC, and more recently in 2020. Between 2015 and 2019, the direction of volatility spillovers runs unidirectionally from WTI to Brent oil prices. In 2020, however, a Granger-causal feedback relation between the volatility of WTI and Brent crude oil prices is again detected. This is due to the uncertainty surrounding how the COVID-19 pandemic will evolve and how long the economies and financial markets will be affected. In this uncertain environment, commodities markets participants could be reacting to prices and volatility signals on both WTI and Brent, leading to the detection of a feedback relation.     

Impacts of COVID-19 outbreak,macroeconomic and financial stress factors on price spillovers among green bond

We examine the impacts of the COVID-19 pandemic and global risk factors on the upside and downside price spillovers of MSCI global, building, financial, industrial, and utility green bonds (GBs). Using copulas, CoVaR, and quantile regression approaches, we show symmetric tail dependence between MSCI global GB and both building and utility GBs. Moreover, the upper tail dependence between MSCI global GB and financial GB intensified during COVID-19. We find asymmetric risk spillovers from MSCI global GB to the remaining GBs. Finally, the COVID-19 spread, the Citi macro risk index, and the financial condition index contribute positively to the quantiles' risk spillovers. The spillover index method shows significant dynamic volatility spillovers from global GB to GB sectors that intensify during the pandemic outbreak, except for financial GB. The causality-in-mean and in-variance from COVID-19, Citi macro risk index, and US financial condition index to the downside and upside spillover effects are sensitive to quantiles     

Risk transmission between Islamic and conventional stock markets: A return and volatility spillover analysis

This paper contributes to the current debate on the empirical validity of the decoupling hypothesis of the Islamic stock market from its mainstream counterparts by examining return and volatility spillovers across the global Islamic stock market, three main conventional national stock markets (the US, the UK and Japan) and a number of influential macroeconomic and financial variables over the period from July 1996 to June 2016. To that end, the VAR-based spillover index approach based on the generalized VAR framework developed by Diebold and Yilmaz (2012) is applied. The empirical analysis shows strong interactions in return and volatility among the global Islamic stock market, the conventional stock markets and the set of major risk factors considered. This finding means that the Islamic equity universe does not constitute a viable alternative for investors who wish to hedge their investments against the vagaries of stock markets, but it is exposed to the same global factors and risks hitting the conventional financial system. Therefore, this evidence leads to the rejection of the decoupling hypothesis of the Islamic stock market from conventional stock markets, which has significant implications for faith-based investors and policy makers in terms of portfolio diversification, hedging strategies and contagion risk.     

Covid-19 pandemic and spillover effects in stock markets: A financial network approach

This paper examines the impact of the COVID-19 pandemic on 51 major stock markets, both emerging and developed. We isolated the countries susceptible to shock transmissions, and evaluated countries with immunity, during the lockdown. Specifically, using dependence dynamics and network analysis on a bivariate basis, we identify volatility and contagion risk among stock markets during the COVID-19 pandemic. The empirical findings add to the existing body of literature, given that previous work has not placed emphasis on network topologic metrics when it comes to financial networks, specifically during the COVID-19. The evidence shows instant financial contagion a result of the lockdown and the spread of the novel coronavirus. The methodological framework outlines important information for investors and policymakers on using financial networks to improve portfolio selection, by placing an emphasis on assets according to centrality.     

Revisiting conventional and green finance spillover in post-COVID world: Evidence from robust econometric models

In 2020, ESG funds that invest in companies that score higher on environmental, social, and governance measures witnessed an increase in investment compared to 2019. Understanding the causal relationship and spillover between these two types of indexes may help investors determine if clean energy indexes follow the same trend as conventional indexes or the reverse. Additionally, investors would benefit from understanding this causation in both the pre- and post-Covid-19 eras. We conceive this study to plug this gap and advance the knowledge in this critical area. We study the causality and spillover between NASDAQ clean energy indexes, and their corresponding alternatives namely, NASDAQ Composite Index and NASDAQ Global Select Market Composite using the daily data and from 1 st January 2011 to 29 th June 2021. We apply the Granger-Causality test and the spillover models approach by Diebold and Yilmaz (2012) and Baruník and Křehlík (2018) to determine any medium-run, or long-run causality, and spillover between the indexes under reference, respectively. Our results suggest us to observe that both sustainable and green indexes exhibit bi-directional causality where both sets of indexes impact each other in the long-run. Additionally, after the emergence of the COVID-19 pandemic, the connectivity between the two sets of indices rose significantly. Our findings also suggest that the investors will not lose on risk-adjusted returns if they chose to go green. With the investors' ability to shift towards green investment without losing on financial returns, it shall become even easier for businesses to steer their operations.     

Volatility spillovers and hedging effectiveness between the oil market and Eurozone sectors: A tale of two crises

This paper aims to analyze the mean and volatility spillovers between oil prices and the Eurozone supersector returns. It uses daily data of the Brent prices and 19 Eurozone supersector indices for the period from August 2004 to August 2015. This area experienced two important instabilities in that period, the global financial crisis (GFC) and the Euro debt crisis (EDC). Because financial turbulences are suspected to induce changes in the volatility dynamics, the full sample is divided into three sub-samples. Empirically, this study employs a bivariate VAR-BEKK-GARCH model that allows for transmission in volatility. The obtained volatilities and covariances are used to compute the optimal weights and hedge ratios for oil–stock portfolio holdings. The findings show that both mean and volatility spillovers between the oil market and the different Eurozone sectors are time-varying and heterogeneous. In the GFC sub-period, there is evidence of contagion effects because there is an intensification of volatility spillovers. The EDC does not seem to have induced any particular change in the spillover effects. The optimal weights, hedge ratios, and correlation analysis results allow an accurate understanding of the time series relationship between the two markets and are useful for financial market participants and policymakers.     

Extreme spillover effect of COVID-19 pandemic-related news and cryptocurrencies on green bond markets: A quantile connectedness analysis

We provide the first empirical study on the role of panic and stress related to the COVID-19 pandemic, including six uncertainties and the four most traded cryptocurrencies, on three green bond market volatilities. Based on daily data covering the period from January 1, 2020 to January 31, 2022, we combine Diebold and Yilmaz's (2012, 2014) time domain spillover approach and Ando et al.'s (2022) quantile regression framework to investigate the time-frequency spillover connectedness among markets and measure the direction and intensity of the net transmission effect under extreme negative and positive event conditions, and normal states. We further provide novel insights into the green finance literature by examining sensitivity to quantile analysis of the net transfer mechanism between green bonds, cryptocurrencies, and pandemic uncertainty. Regarding the network connectedness analysis, the results reveal strong net information spillover transmission among markets under the bearish market. In extremely negative event circumstances, the MSCI Euro green bond acts as the leading net shock receiver in the system, whereas COVID-19 fake news appears as the largest net shock contributor, followed by BTC. According to sensitivity to quantile analysis, the net dynamic shock transfer mechanism is time-varying and quantile-dependent. Overall, our work uncovers crucial implications for investors and policymakers.     

The Eurozone banking sector in the time of COVID-19: Measuring volatility connectedness

This article investigates the volatility connectedness of the Eurozone banking system over the last 15 years (from 2005 to 2020). Applying the Diebold-Yilmaz Connectedness Index model to the daily stock return volatilities of 30 major Eurozone banks, we are able to measure the risk spillover effects and to capture the COVID-19 outbreak's impact on banking stability. The empirical findings show that the 30 banks are highly interconnected. Furthermore, we show the strong impact of the COVID-19 pandemic on the volatility dynamics, i.e., on the structure of the Eurozone banking system. Dynamically, we find that volatility connectedness increases during crises, reaching its maximum peak at the time of COVID-19. The analysis points out the critical role of volatility transmission played by large banks, highlighting the “too-big-to-fail” characteristic of this banking system. However, we find that small-medium banks are important actors of contagion, supporting the thesis that the Eurozone banking system is also “too-interconnected to fail.” Finally, we document the heterogeneity effect of the COVID-19 pandemic between Eurozone banking systems. This heterogeneity impact could be a future source of financial instability within the Eurozone.     

Dissecting hedge funds' strategies

This paper dissects the dynamics of the hedge fund industry with four financial markets, including the equity market, commodities, currencies, and debt market by employing a large number of assets from these markets. We employ four main representative hedge fund strategy indices, and a cap-weighted global index to estimate an asymmetric dynamic conditional correlation (ADCC) GJR-GARCH model using daily data from April 2003 to May 2021. We break down the performance, riskiness, investing style, volatility, dynamic correlations, and shock transmissions of each hedge fund strategy thoroughly. Further, the impact of commodity futures basis on hedge funds' return is analyzed. Comparing the dynamic correlations during the 2008 global financial crisis (GFC) with COVID-19 pandemic reveals changing patterns in hedge funds' investing styles. There are strong and pervasive shock spillovers from hedge fund industry to other financial markets, especially to futures commodities. An increase in the futures basis of several commodities drives up hedge funds' performance. While hedge fund industry underperforms compared to equity market and commodities, the risk-reward measures show that hedge funds are superior to other markets, and safer than the bond market.     

Multilayer information spillover networks between oil shocks and banking sectors: Evidence from oil-rich countries

There is no doubt that oil price shocks significantly affect oil-producing countries' macroeconomic fundamentals and financial stability, mainly in crisis times. The recent oil price shocks, coupled with the COVID-19 pandemic, motivated us to investigate the connectedness and risk transmission among oil shocks and banking sectors in the Gulf Cooperation Council (GCC) economies from June 30, 2006, to September 9, 2021. Thus, we construct multilayer information spillover networks between oil price shocks and GCC banking sectors. The empirical results show that the Bahrain banking sector depicts the highest connectedness and risk transmission with oil price shocks on the extreme risk spillover layer. In addition, Kuwait and the United Arab Emirates are highly connected to oil demand shocks. Furthermore, we find a substantial increase in extreme risk spillover and volatility spillover layers during the COVID-19 period. The results of this paper have some important implications for regional portfolio risk management, alleviating systemic risk, and developing hedging and investment strategies.     

Are safe haven assets really safe during the 2008 global financial crisis and COVID-19 pandemic?

This study evaluates the safe-haven role of twelve assets against the US stock market during the 2008 global financial crisis (GFC) and the COVID-19 pandemic. Our results show that silver and the Islamic stock index were safe havens during the 2008 GFC, and the Islamic stock index and Tether have been safe havens during COVID-19. We observe that the Islamic stock index and Tether have emerged as strong new safe havens. However, our supplementary analysis reveals that gold and Bitcoin still exhibit safe-haven behavior during severe market downturns. Overall, our findings suggest that safe-haven assets may vary over time.     

The impact of the Russian-Ukrainian war on global financial markets

On February 24, 2022, Russia invaded the Ukraine. In this paper, we analyze the response of European and global stock markets alongside a representative sample of commodities. We compare the war response against the recent Covid-19 pandemic and the not-too-distant 2008 global financial crisis. Applying a Markov-switching HAR model on volatility proxies, estimates are made of synchronization, duration and intensity measures for each event. In broad terms, stock markets and commodities respond most rapidly to the Russian invasion; and post-invasion crisis intensity is noticeably smaller compared to both the Covid-19 and the GFC. Wheat and nickel are the most affected commodities due to the prominent exporter status of the two countries.     

Measuring bilateral spillover and testing contagion on sovereign bond markets in Europe

The global financial crisis rapidly spread across borders and financial markets, and also distressed EU bond markets. The crisis did not hit all markets in the same way. We measure the strength and direction of linkages between 16 EU sovereign bond markets using a factor-augmented version of the VAR model in Diebold and Yilmaz (2009). We then provide a novel test for contagion by applying the multivariate structural break test of Qu and Perron (2007) on this FAVAR detecting significant sudden changes in shock transmission. Results indicate substantial spillover, especially between EMU countries, with Belgium, Italy and Spain being key markets during the financial crisis. Contagion has been a rather rare phenomenon limited to a few well defined moments of uncertainty on financial assistance packages for Greece, Ireland and Portugal. Most of the frequent surges in market co-movement are driven by larger shocks rather than by contagion.