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Structural change in the link between oil and the European stock market: implications for risk management

Structural change in the link between oil and the European stock market: implications for risk... AbstractThe relationship between the European stock market and the crude oil depends on the significance of the different industries in the European economy. The literature points to a structural change after the 2008 crisis without getting into details of which sectors lead this regime switch. The co-movement between oil prices and stock market is known to exhibit (1) non-linearity, (2) asymmetric tail dependence and (3) variation over time. I combine a copula approach with Switching Markov models to capture this complex linkage while the CoVaR measure translates the consequences of the tail dependence into potential losses. The results indicate a change in the lower tail dependence from negative to positive association between oil and Eurostoxx, meaning a shift in the exposure of our stock portfolio to commodity risk. There is a structural change in dependence after the 2008 financial crisis led by energy-intensive sector, e.g. basic materials and consumer goods. The economic cycle and its implications for profit margin and oil demand might explain this switch. Healthcare sector responds to oil shocks in an opposite way than Eurostoxx, displaying useful features to reduce the exposure of the stock portfolio to oil spillovers. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Dependence Modeling de Gruyter

Structural change in the link between oil and the European stock market: implications for risk management

Dependence Modeling , Volume 7 (1): 73 – Jan 1, 2019

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Publisher
de Gruyter
Copyright
© 2019 Javier Ojea Ferreiro, published by De Gruyter
ISSN
2300-2298
eISSN
2300-2298
DOI
10.1515/demo-2019-0004
Publisher site
See Article on Publisher Site

Abstract

AbstractThe relationship between the European stock market and the crude oil depends on the significance of the different industries in the European economy. The literature points to a structural change after the 2008 crisis without getting into details of which sectors lead this regime switch. The co-movement between oil prices and stock market is known to exhibit (1) non-linearity, (2) asymmetric tail dependence and (3) variation over time. I combine a copula approach with Switching Markov models to capture this complex linkage while the CoVaR measure translates the consequences of the tail dependence into potential losses. The results indicate a change in the lower tail dependence from negative to positive association between oil and Eurostoxx, meaning a shift in the exposure of our stock portfolio to commodity risk. There is a structural change in dependence after the 2008 financial crisis led by energy-intensive sector, e.g. basic materials and consumer goods. The economic cycle and its implications for profit margin and oil demand might explain this switch. Healthcare sector responds to oil shocks in an opposite way than Eurostoxx, displaying useful features to reduce the exposure of the stock portfolio to oil spillovers.

Journal

Dependence Modelingde Gruyter

Published: Jan 1, 2019

References