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

Filis, George and Degiannakis, Stavros and Floros, Christos (2011): Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries. Published in: International Review of Financial Analysis , Vol. 3, No. 20 (2011): pp. 152-164.

Abstract

The paper investigates the time-varying correlation between stock market prices and oil prices for oil-importing and oil-exporting countries. A DCC-GARCH 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: oil prices, stock market returns, DCC-GARCH, dynamic correlation
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy

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