Testing the volatility spillover between crude oil price and the U.S. stock market returns

Abstract

The study aims to examine the volatility transmission between the West Texas Intermediate (WTI) crude oil price returns and the U.S. stock market (S&P500 index) returns for the period 2006-2016. In the empirical analyses, univariate GARCH and multivariate GARCH (BEKK-GARCH) models are employed to investigate potential volatility spillover effect of crude oil price returns on the S&P500 index returns or vice versa. The results of GARCH methods reveal that (i) volatility spill-over effect of S&P500 index returns on the crude oil returns is more significant than the volatility spillover effect of crude oil on the S&P500 index returns by using univariate GARCH model; and (ii) there is a one way volatility spillover effect that runs from S&P500 index returns to crude oil returns when we apply multivariate BEKK-GARCH model. These findings have implications for in-vestors and oil-stock portfolio holders for their portfolio decisions in order to manage their risks on their international investments. Further, crude oil investment participants should consider the changes in U.S. stock market index returns in order to predict the expected volatility in the crude oil returns.

Keywords

• S&P500 index returns
• Crude oil price returns
• U.S. stock market
• BEKK-GARCH
• GARCH