Volatility Spillovers and Nexus across Oil, Gold, and Stock European Markets

Abstract

This paper utilises a trivariate VAR-BEKK-GARCH model to investigate the dynamic relationships between global oil price, gold price, and European stock markets. This paper observes weak return spillover effects from the oil market to 6 European stock markets (Netherlands, Lithuania, Portugal, Czech Republic, Romania, and Slovenia) and from gold to Iceland, while there is no evidence of return spillovers from stock markets to oil and gold. The non-existence of return linkages between gold and stock (oil) suggests that the gold market plays a haven role. With reference to volatility spillovers, the results show obvious asymmetric bidirectional volatility interaction between the European stock markets and the global oil/gold markets. Stronger shock and volatility contagions from the European stock market to both oil and gold markets are observed compared with the opposite direction. For the volatility nexus between oil and gold, weak and moderate evidence of shock and volatility transmission from gold to oil markets is reported. Additionally, the study documents important and effective empirical implications for portfolio management and investment hedge strategies: firstly, adding European stock markets to a diversified oil/gold portfolio can achieve the expected returns while reducing risk; and secondly, the European investors can use the gold and oil markets to hedge against their stock market portfolio.

Keywords

• volatility spill overs and nexus across oil
• gold
• european countries
• stock markets