Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

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

Download PDF
19 pages

Loading next page...
 
/lp/emerald-publishing/correlation-transmission-between-crude-oil-and-indian-markets-tNtlFy8wcy
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 Research – Emerald Publishing

Published: Aug 16, 2013

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

References

  • Do structural oil‐market shocks affect stock prices?
    Apergis, N.; Miller, S.M.
  • Oil prices, stock markets and portfolio investment: evidence from sector analysis in Europe over the last decade
    Arouri, M.; Nguyen, D.K.
  • Volatility spillovers between oil prices and stock sector returns: implications for portfolio management
    Arouri, M.E.H.; Jouini, J.; Nguyen, D.K.
  • On the impacts of oil price fluctuations on European equity markets: volatility spillover and hedging effectiveness
    Arouri, M.E.H.; Jouini, J.; Nguyen, D.K.
  • Oil prices and equity returns in the BRIC countries
    Bhar, R.; Nikolova, B.
  • Evidence on the nature and extent of the relationship between oil and equity value in UK
    El‐Sharif, I.; Brown, D.; Burton, B.; Nixon, B.; Russell, A.
  • Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional heteroskedasticity models
    Engle, R.F.
  • WTI crude oil futures in portfolio diversification: the time‐to‐maturity effect
    Geman, H.; Kharoubi, C.
  • Shock and volatility spillovers among equity sectors of the Gulf Arab stock markets
    Hammoudeh, S.M.; Yuan, Y.; McAleer, M.
  • Energy shocks and financial markets
    Huang, R.; Masulis, R.; Stoll, H.
  • Oil and stock markets
    Jones, C.; Kaul, G.
  • The economic effects of energy price shock
    Kilian, L.
  • Oil price shocks and stock market behavior
    Kling, J.L.
  • Modeling asymmetric movements of asset prices
    Kroner, K.F.; Ng, V.K.
  • Time‐varying distributions and dynamic hedging with foreign currency futures
    Kroner, K.F.; Sultan, J.
  • On the application of the dynamic conditional correlation model in estimating optimal time‐varying hedge ratios
    Ku, Y.H.H.; Chen, H.C.; Chen, K.H.
  • On the dynamic effects of oil price shocks: a study using industry level data
    Lee, K.; Ni, S.
  • Asymptotic theory for a vector ARMA‐GARCH model
    Ling, S.; McAleer, M.
  • Stock market prices do not follow random walks: evidence from a simple specification test
    Lo, A.; MacKinlay, A.
  • Oil prices and transport sector returns: an international analysis
    Nandha, M.; Brooks, R.
  • Does oil move equity prices? A global view
    Nandha, M.; Faff, R.
  • Oil price shocks and stock market activity
    Sadorsky, P.
  • Risk factors in stock returns of Canadian oil and gas companies
    Sadorsky, P.
  • Correlations and volatility spillovers between oil prices and the stock prices of clean energy and technology companies
    Sadorsky, P.
  • Diversification benefits of commodity assets in global portfolios
    Satyanarayan, S.; Varangis, P.