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Correlation transmission between crude oil and Indian markets

Correlation transmission between crude oil and Indian markets Purpose – In this paper, the authors aim to investigate the return, volatility and correlation spillover effects between the crude oil market and the various Indian industrial sectors (automobile, financial, service, energy, metal and mining, and commodities sectors) in order to investigate optimal portfolio construction and to estimate risk minimizing hedge ratios. Design/methodology/approach – The authors compare bivariate generalized autoregressive conditional heteroskedasticity models (diagonal, constant conditional correlation and dynamic conditional correlation) with the vector autoregressive model as a conditional mean equation and the vector autoregressive moving average generalized autoregressive conditional heteroskedasticity model as a conditional variance equation with the error terms following the Student's t distribution so as to identify the model that would be appropriate for optimal portfolio construction and to estimate risk minimizing hedge ratios. Findings – The authors’ results indicate that the dynamic conditional correlation bivariate generalized autoregressive conditional heteroskedasticity model is better able to capture time‐dynamics in comparison to other models, based on which the authors find evidence of return and volatility spillover effects from the crude oil market to the Indian industrial sectors. In addition, the authors find that the conditional correlations between the crude oil market and the Indian industrial sectors change dynamically over time and that they reach their highest values during the period of the global financial crisis (2008‐2009). The authors also estimate risk minimizing hedge ratios and oil‐stock optimal portfolio holdings. Originality/value – This paper has empirical originality in investigating the return, volatility and correlation spillover effects from the crude oil market to the various Indian industrial sectors using BVGARCH models with the error terms assumed to follow the Student's t distribution. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png South Asian Journal of Global Business Research Emerald Publishing

Correlation transmission between crude oil and Indian markets

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Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
2045-4457
DOI
10.1108/SAJGBR-08-2012-0104
Publisher site
See Article on Publisher Site

Abstract

Purpose – In this paper, the authors aim to investigate the return, volatility and correlation spillover effects between the crude oil market and the various Indian industrial sectors (automobile, financial, service, energy, metal and mining, and commodities sectors) in order to investigate optimal portfolio construction and to estimate risk minimizing hedge ratios. Design/methodology/approach – The authors compare bivariate generalized autoregressive conditional heteroskedasticity models (diagonal, constant conditional correlation and dynamic conditional correlation) with the vector autoregressive model as a conditional mean equation and the vector autoregressive moving average generalized autoregressive conditional heteroskedasticity model as a conditional variance equation with the error terms following the Student's t distribution so as to identify the model that would be appropriate for optimal portfolio construction and to estimate risk minimizing hedge ratios. Findings – The authors’ results indicate that the dynamic conditional correlation bivariate generalized autoregressive conditional heteroskedasticity model is better able to capture time‐dynamics in comparison to other models, based on which the authors find evidence of return and volatility spillover effects from the crude oil market to the Indian industrial sectors. In addition, the authors find that the conditional correlations between the crude oil market and the Indian industrial sectors change dynamically over time and that they reach their highest values during the period of the global financial crisis (2008‐2009). The authors also estimate risk minimizing hedge ratios and oil‐stock optimal portfolio holdings. Originality/value – This paper has empirical originality in investigating the return, volatility and correlation spillover effects from the crude oil market to the various Indian industrial sectors using BVGARCH models with the error terms assumed to follow the Student's t distribution.

Journal

South Asian Journal of Global Business ResearchEmerald Publishing

Published: Aug 16, 2013

Keywords: Crude oil prices; Volatility; Indian industrial sectors; Hedge ratios; Portfolio construction; Oils; Oil industry; India

References