Asymmetric volatility spillover between oil-importing and oil-exporting countries' economic policy uncertainty and China's energy sector

While the relationship between economic policy uncertainty(EPU) and energy market is of great interest to economist, previous research dose not differentiate the effect from oil-importing countries to oil-exporting countries' EPU on the a country's energy sector. In this paper, we address this issue by testing the effect of importer and exporter's EPU on the largest oil-importing country, China, as oil-importing affected greatly by the economic policy. TVP-FAVAR model is applied to obtain the factors and time-varying coefficients of 21 countries' EPU monthly indexes and energy stock realized volatility. We find that the Chinese energy sector's stock volatility is positively related to EPU shocks and that bad volatility has a stronger impact than good volatility. Second, the volatility spillover from oil-exporting countries' EPU on the Chinese energy sector is stronger than that from oil-importing countries' EPU, with a stronger effect for bad volatility than for good volatility. Finally, The bad volatility spillover and spillover asymmetry is stronger during the crisis periods, such as the debt crisis, energy contention, oil price turbulence, or limited production agreement, both symmetric and asymmetric spillovers increase. Our findings have potentially important implications for the regulators and investors on Chinese oil market with different types of countries' EPU.     

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.     

Investigating volatility spillover of energy commodities in the context of the Chinese and European stock markets

This paper investigates spillover from energy commodities to Shanghai stock exchange and European Stock market, and identifies possible risks transmission and portfolio diversification opportunities. The study is conducted on daily spot prices of carbon (CO2) emission, natural gas and crude oil from 16 December 2010 to 29 December 2022, employing Granger causality test, dynamic conditional correlation (DCC), Diebold-Yilmaz (2012) and Barunik-Krehlic (2017) models. Results identify higher volatility and imply greater connectedness in the longer run. Additionally, natural gas is witnessed as the highest contributor of the shocks and crude oil as the highest receiver of the shocks from the network connection. Further results suggest for investment in energy commodities in shorter run rather than long run for efficient portfolio diversification. Results from this study are expected to have practical implications for portfolio managers, investors, and market regulators, given the suggestion of this study to incorporate energy stocks for efficient diversification of risk.     

国际原油价格对我国新能源行业股票价格的波动溢出效应研究

在大气污染日益严峻的情况下,新能源行业受政府大力支持和投资者青睐。新能源与原油一定程度上互为替代品,理论上国际原油价格必然对我国新能源行业股票价格有显著的波动溢出效应,但有些学者却持反对态度,认为我国股票市场对外还没有完全开放,新能源行业发展又很不成熟,所以该溢出效应很难显著。文章运用VAR- Asymmetric- BEKK模型进行比较研究得出：在未去除我国整体股市行情因素时,国际原油价格波动对我国新能源行业股票价格波动溢出效应不显著;而在去除我国整体股行情因素时,国际原油价格波动对我国新能源行业股票价格波动溢出效应在1%显著性水平下显著。表明存在从国际原油价格向我国新能源行业股票价格的波动溢出效应,只是该溢出效应被我国股市总体行情掩盖了。     

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.     

Risk Transmission from Oil and Natural Gas Futures to Emerging Market Mutual Funds

This study evaluates the impacts of energy markets on emerging market mutual funds (EMMFs). In particular, we investigate the volatility transmission between these funds and the oil and natural gas prices. The findings suggest significant risk spillover from the energy markets to EMMFs. Furthermore, we find a large number of EMMFs’ risk transmitting to oil prices and almost all of the EMMFs’ risk transmitting to natural gas prices. By dividing the sample into two (before and after 2008), we find the EMMFs’ influence on the oil market decreasing after this turbulent period. Our results have important implications for mutual fund managers and investors.     

Oil price shocks and American depositary receipt stock returns

In this paper we examine the impact of oil price shocks on twelve countries American Depositary Receipt (ADR) returns using monthly data from 1999.01 to 2014.12. The results show that oil price shocks have a positive and statistically significant impact on ADR return in all twelve countries. These results are robust to the inclusion of other explanatory variables such as oil price volatility and the spillover of the United States stock market. Further analysis shows that this effect is stronger in the post financial crisis time period compared to the pre-financial crisis time period.     

Time-varying linkages between energy and stock markets: Dynamic spillovers and driving factors

Integration between international energy prices and stock market returns is critical for global economics and politics. In this study, we employ a TVP-VAR (time-varying parameter vector autoregression) connectedness decomposition approach to investigate the time-varying linkages between a diversified energy portfolio comprising oil, coal, natural gas, and stock returns in G7 countries and China. This approach allows us to show the dynamic spillovers and explore the driving factors underlying the dynamic patterns. We find that geopolitical risks, global economic policy uncertainties, and equity market volatility can influence cross-market spillovers. This study expounds the effect of energy financialization.     

Oil shocks and stock market volatility of the BRICS: A GARCH-MIDAS approach

In this study, we employ the GARCH–MIDAS (Generalised Autoregressive Conditional Heteroskedasticity variant of Mixed Data Sampling) model to investigate the response of stock market volatility of the BRICS group of countries (Brazil, Russia, India, China, and South Africa) to oil shocks. We utilise the recent datasets of Baumeister & Hamilton (2019), where oil shocks are decomposed into four variants: oil supply shocks, economic activity shocks, oil consumption shocks, and oil inventory shocks. We further decompose each of these shocks into positive and negative shocks, and our findings show heterogeneous response of stock market volatility of the BRICS countries to the alternative oil shocks, including positive and negative shocks. The differing responses across the BRICS countries could be attributed to differences in the economic size, oil production, and consumption profile of the countries, market share distribution across firms, and financial system and regulation efficiency.     

Computing the market price of volatility risk in the energy commodity markets

In this paper, we demonstrate the need for a negative market price of volatility risk to recover the difference between Black–Scholes [Black, F., Scholes, M., 1973. The pricing of options and corporate liabilities. Journal of Political Economy 81, 637–654]/Black [Black, F., 1976. Studies of stock price volatility changes. In: Proceedings of the 1976 Meetings of the Business and Economics Statistics Section, American Statistical Association, pp. 177–181] implied volatility and realized-term volatility. Initially, using quasi-Monte Carlo simulation, we demonstrate numerically that a negative market price of volatility risk is the key risk premium in explaining the disparity between risk-neutral and statistical volatility in both equity and commodity-energy markets. This is robust to multiple specifications that also incorporate jumps. Next, using futures and options data from natural gas, heating oil and crude oil contracts over a 10 year period, we estimate the volatility risk premium and demonstrate that the premium is negative and significant for all three commodities. Additionally, there appear distinct seasonality patterns for natural gas and heating oil, where winter/withdrawal months have higher volatility risk premiums. Computing such a negative market price of volatility risk highlights the importance of volatility risk in understanding priced volatility in these financial markets.     

Forecasting European stock volatility: The role of the UK

This study investigates the lead–lag relationships of volatility among European stock markets. Using weakly realized variance measures, we examine volatility spillover dynamics between the UK and other major stock markets in Europe, thereby identifying a long-run leading role for the UK market portfolio. Lagged UK volatility can significantly predict volatilities in non-UK countries, whereas lagged non-UK volatility has a limited association with UK volatility. Moreover, pairwise Granger causality estimations, predictive regression specifications, and out-of-sample validations reveal that volatility shocks in the UK are gradually reflected in market fluctuations across Europe with varying market-specific delays. Our findings support the limited attention explanation for the volatility predictability of the lagged UK equity index.     

Financial and Economic Integration's Impact on Asian Equity Markets’ Sensitivity to External Shocks

This paper investigates the spillover effects from U.S. and regional stock markets on local stock markets in the Pacific Basin region and China. We also analyze if the spillover depends on countries’ financial and economic integration. We apply a stochastic volatility model with jumps in order to separate the spillover of extreme shocks from those of normal shocks. We find that the spillovers of both normal and extreme shocks are significant for almost all Asian countries except China. We also find that the time‐variation in stock market interdependence can largely be associated with economic integration.     

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.     

国际金融市场与国际原油期货市场溢出效应实证检验——基于VAR-BEKK模型的分析

文章通过构建VAR模型和BEKK模型对道琼斯股票市场、美元/欧元汇率市场与国际原油期货市场的动态关系进行了实证检验。结果表明：道琼斯股票市场与WTI原油期货市场存在双向的价格溢出效应,以及前者向后者的单向波动溢出效应;美元/欧元汇率市场存在向WTI原油期货市场单向的价格溢出效应和波动溢出效应。所以,国际原油期货市场与国际金融市场联系紧密,国际原油的金融属性日益体现,其价格变动更多受外部国际金融市场风险影响。     

The impact of distressed economies on the EU sovereign market

Financially distressed economies inside the European Union (EU) are being blamed for producing a general increase in borrowing costs. This article analyzes the channels of default risk transmission within the EU countries using the information content in the sovereign Credit Default Swap (CDS) market. We proceed in two directions. First, we test the existence of cross-border volatility effects between the central and the peripheral EU countries. Second, we explore the effect of distressed economies on the default and risk premium constituents of sovereign default swaps. We show a significant volatility spillover from distressed to central European Economic and Monetary Union (EMU) economies. This causality pattern leads to a significant impact on the default swap risk premia. On average, the risk premium accounts for approximately 42% of central EMU spreads and 56% of the spreads for those countries outside of the EMU. The peripheral risk also affects the default component of central economies, although its impact is lower.     

The transmission of market shocks and bilateral linkages: Evidence from emerging economies

The linkage between emerging and developed economies spans beyond the usual trade in goods and services. Underlying trade is the flow of capital for foreign direct investment and for speculation in markets, which renders emerging economies vulnerable to shocks from the developed world. As such, equity return volatility in emerging markets is partly attributable to this dependence. To gauge the importance of bilateral economic and cultural factors in driving economic integration, we adopt a two-step process. First, we use Diebold and Yilmaz's spillover index methodology to extract spillover indices representative of the return volatility spillover effects of the United States, the developed portion of the Euro area, and Japan on financial markets in Asia, the Gulf Cooperation Council countries, Eastern and Central Europe, Africa, and Latin America. Second, we test whether these indices are governed by economic and cultural factors. Our results show that the spillover effects vary across markets and that a strong correlation exists with the volume of trade, security investment, common language, distance, and market capitalization.     

Oil price shocks,investor sentiment,and asset pricing anomalies in the oil and gas industry

This paper documents that stocks are not efficiently priced in the oil and gas industry. We find significant cross-sectional effects on stock returns from various firm characteristics in the oil and gas industry. Specifically, 13 out of 15 prominent capital market anomalies are robust in the oil and gas industry. Investor sentiment has significantly positive impact on 4 anomalies: composite equity issues, investment to assets, net stock issues, and value effect. Among the three oil shocks, we find that aggregate demand shocks have significantly impact on 6 anomalies: composite equity issues, financial distress, net stock issues, O-SCORE, return on assets, and idiosyncratic volatility. Our results are consistent with the view that high arbitrage costs and risks have significant deterring effects on arbitrage in the oil and gas industry. Our findings also have practical investment and policy implications for investors, firm managers, and policy makers alike.     

Scenarios on European energy security: Outcomes of natural gas strategy in 2020

This paper adopts a futuristic methodology and analyzes the role of natural gas in European energy security in order to transform economic and policy uncertainties into meaningful scenarios. It implements “trend analysis” to forecast the volume of gas needed until 2020 by elaborating the estimates of the EU Commission and “scenario building” to come up with alternative futures forging different regional implications. The economic analysis stems from four scenarios as introduced by the EU Commission: (1) baseline scenario with average oil price of 61$/bbl; (2) baseline scenario with average oil price of 100$/bbl; (3) New Energy Policy scenario with average oil price of 61$/bbl; (4) New Energy Policy scenario with average oil price of 100$/bbl. The policy analysis is derived from the options, restraints, priorities and strategies of the concerned actors which include the EU Commission, selected EU members, suppliers and transit countries. The analysis on actors results in four policy scenarios: (1) Russia first; (2) Russia everywhere; (3) security first; (4) each for itself. The matrix, which excludes the possibility of unprecedented developments such as a drastic increase in European shale gas production or continuing global recession, clusters 16 contingencies. The paper, within this context, gives an idea on how alternative policy options of European energy security may lead to different futures based on oil prices, environmental commitments and strategic initiatives of the concerned actors.     

Inter- and intra-regional stock market relations for the GCC bloc

This paper examines the patterns of information transmission for equity markets in the seven Gulf Cooperation Council countries over the period from 2004 to 2019. Using weekly data, correlations and spillovers both within the region and from the US, the EU and Japan are modelled through the Dynamic Conditional Correlation-GARCH model and the Diebold-Yilmaz spillover index. While GCC markets exhibit increasing correlations with, primarily, the EU and, to a lesser extent, the US, they nonetheless remain relatively less interlinked globally. Our findings support significant return and volatility spillovers from the EU and the US to the GCC markets, with stronger spillovers from the EU. Intra-regionally, the UAE is the main transmitter and receiver of spillovers between the GCC and world markets. Furthermore, we see evidence of a decoupling pattern within the GCC countries, with notable segmentation in the markets of Bahrain and Kuwait.     

Asymmetry in return and volatility spillover between equity and bond markets in Australia

We document asymmetry in return and volatility spillover between equity and bond markets in Australia for daily returns during the period 1992–2006 using a bivariate GARCH modelling approach. Negative bond market returns spillover into lower stock market returns whereas good news originating in the equity market leads to lower bond returns. Bond market volatility spills over into the equity market but the reverse is not true. Transmission of bond volatility into equity volatility depends in a complex way upon the respective signs of the return shocks in each market.