Volatility Spillovers Between Oil and Stock Market Returns in G7 Countries: A VAR-DCC-GARCH Model

  • Göknur BüyükkaraEmail author
  • Onur Enginar
  • Hüseyin Temiz


The oil prices declined from a peak of $115 per barrel to under $35 between June 2014 and February 2016. This decline was due to the decision of the Organization of Petroleum Exporting Countries (OPEC) to maintain an oversupply in November 2014, despite declining demand for crude oil and the United States’ growing shale capacity. We examine whether the decline in oil prices can be attributed to the impact of OPEC oversupply on stock market volatility in the G7 countries. We apply a vector autoregressive model in a multivariate generalized autoregressive setting with the dynamic conditional correlation. The results indicate bilateral volatility spillovers since the beginning of the 2014 oversupply period. Dynamic correlations between oil and stock prices started to increase but, in the middle of 2016, started to decrease again after rebalancing. Oil price decreases seemed to increase the conditional correlations between oil and the stock market in the USA, Europe, Japan, and Canada as investors responded positively to oil price declines. Analyzing hedge ratios calculated from the conditional correlations and portfolios we establish, we find that optimal oil-stock portfolios outperforms index investment.


Volatility spillover VAR-DCC-GARCH OPEC oversupply Stock market Oil market 



We thank Wim Westerman and John Simpson for their valuable ideas at the presentation of this paper’s preliminary analysis and comments at the Sixth Multinational Energy and Value Conference, May 18–20, 2017, in Guzelyurt, Turkish Republic of Northern Cyprus.


  1. Aimer NM (2016) Conditional correlations and volatility spillovers between crude oil and stock index returns of Middle East countries. Open Access Libr J 3(12):1–23Google Scholar
  2. Apergis N, Miller SM (2009) Do structural oil-market shocks affect stock prices? Energy Econ 31(4):569–575CrossRefGoogle Scholar
  3. Arouri MEH, Jouini J, Nguyen DK (2011a) Volatility spillovers between oil prices and stock sector returns: implications for portfolio management. J Int Money Financ 30:1387–1405CrossRefGoogle Scholar
  4. Arouri MEH, Lahiani A, Nguyen DK (2011b) Return and volatility transmission between world oil prices and stock markets of the GCC countries. Econ Model 28(4):1815–1825CrossRefGoogle Scholar
  5. Arouri MEH, Jouini J, Nguyen DK (2012) On the impacts of oil price fluctuations on European equity markets: volatility spillover and hedging effectiveness. Energy Econ 34(2):611–617CrossRefGoogle Scholar
  6. Awartani B, Maghyereh AI (2013) Dynamic spillovers between oil and stock markets in the Gulf Cooperation Council Countries. Energy Econ 36:28–42CrossRefGoogle Scholar
  7. Baba Y, Engle RF, Kraft DF, Kroner KF (1990) Multivariate simultaneous generalized ARCH. Working paper, Department of Economics, University of California, San DiegoGoogle Scholar
  8. Baele L (2002) Volatility spillover effects in European equity markets: evidence from a regime switching model. Working paper, Ghent UniversityGoogle Scholar
  9. Bauwens L, Laurent S, Rombouts JV (2006) Multivariate GARCH models: a survey. J Appl Econ 21:79–109CrossRefGoogle Scholar
  10. Bekaert G, Harvey CR (1997) Emerging equity market volatility. J Financ Econ 43:29–77CrossRefGoogle Scholar
  11. Bollerslev T (1986) Generalized autoregressive conditional heteroskedasticity. J Econ 31:307–327CrossRefGoogle Scholar
  12. Bollerslev T (1990) Modelling the coherence in short-run nominal exchange rates: a multivariate generalized ARCH model. Rev Econ Stat 72:498–505CrossRefGoogle Scholar
  13. Boyer MM, Filion D (2007) Common and fundamental factors in stock returns of Canadian oil and gas companies. Energy Econ 3:428–453CrossRefGoogle Scholar
  14. Brown SPA, Yücel MK (2002) Energy prices and aggregate economic activity: an interpretative survey. Q Rev Econ Financ 42:193–208CrossRefGoogle Scholar
  15. Chang CL, McAleer M, Tansuchat R (2013) Conditional correlations and volatility spillovers between crude oil and stock index returns. N Am J Econ Financ 25:116–138CrossRefGoogle Scholar
  16. Christiansen C (2003) Volatility-spillover effects in European bond markets. Centre for Analytical Finance, Aarhus School of Business, University of Aarhus, Working Paper Series No. 162Google Scholar
  17. Du L, He Y, Wei C (2010) The relationship between oil price shocks and China’s macroeconomy: an empirical analysis. Energy Policy 38:4142–4151CrossRefGoogle Scholar
  18. El-Sharif I, Brown D, Burton B, Nixon B, Russell A (2005) Evidence on the nature and extent of the relationship between oil prices and equity values in the UK. Energy Econ 27(6):819–830CrossRefGoogle Scholar
  19. Engle RF (1982) Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica 50:987–1007CrossRefGoogle Scholar
  20. Engle R (2002) Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional heteroskedasticity models. J Bus Econ Stat 20(3):339–350CrossRefGoogle Scholar
  21. Filis G (2010) Macro economy, stock market and oil prices: do meaningful relationships exist among their cyclical fluctuations? Energy Econ 32(4):877–886CrossRefGoogle Scholar
  22. Filis G, Degiannakis S, Christos F (2011) Dynamic correlation between stock market and oil prices: the case of oil-importing and oil-exporting countries. Int Rev Financ Anal 20:152–164CrossRefGoogle Scholar
  23. Fuller WA (1996) Introduction to statistical time series, 2nd edn. Wiley, New YorkGoogle Scholar
  24. Gomes M (2014) Volatility spillovers between oil prices and stock returns: a focus on frontier markets. J Appl Bus Res 30(2):509–526CrossRefGoogle Scholar
  25. Hamilton JD (1983) Oil and the macroeconomy since World War II. J Polit Econ 91:228–248CrossRefGoogle Scholar
  26. Hamilton JD (2003) What is an oil shock? J Econ 113:363–398CrossRefGoogle Scholar
  27. Hassan SA, Malik S (2007) Multivariate GARCH modelling of sector volatility transmission. Q Rev Econ Financ 47(3):470–480CrossRefGoogle Scholar
  28. Jiménez-Rodríguez R, Sánchez M (2005) Oil price shocks and real GDP growth: empirical evidence for some OECD countries. Appl Econ 32(2):201–228CrossRefGoogle Scholar
  29. Jones CM, Kaul G (1996) Oil and the stock markets. J Financ 51(2):463–491CrossRefGoogle Scholar
  30. Khalfaoui R, Boutahar M, Boubaker H (2015) Analyzing volatility spillovers and hedging between oil and stock markets: evidence from wavelet analysis. Energy Econ 49:540–549CrossRefGoogle Scholar
  31. Kilian L (2008) Exogenous oil supply shocks: how big are they and how much do they matter for the U.S. economy? Rev Econ Stat 90(2):216–240CrossRefGoogle Scholar
  32. Kroner KF, Ng VK (1998) Modeling asymmetric movements of asset prices. Rev Financ Stud 11:844–871CrossRefGoogle Scholar
  33. Kroner KF, Sultan J (1993) Time-varying distributions and dynamic hedging with foreign currency futures. J Financ Quant Anal 28:535–551CrossRefGoogle Scholar
  34. Lorde T, Jackman M, Thomas C (2009) The macroeconomic effects of oil price fluctuations on a small open oil-producing country: the case of Trinidad and Tobago. Energy Policy 37:2708–2716CrossRefGoogle Scholar
  35. Malik F, Ewing B (2009) Volatility transmission between oil prices and equity sector returns. In Rev Financ Anal 18(3):95–100CrossRefGoogle Scholar
  36. Malik F, Hammoudeh S (2007) Shock and volatility transmission in the oil, US and Gulf equity markets. Int Rev Econ Financ 16(3):357–368CrossRefGoogle Scholar
  37. McLeod AI, Li WK (1983) Diagnostic checking ARMA time series models using squared-residual autocorrelations. J Time Ser Anal 4:269–273CrossRefGoogle Scholar
  38. Mensi W, Beljid M, Boubaker A, Shunsuke M (2013) Correlations and volatility spillovers across commodity and stock markets: linking energies, food, and gold. Econ Model 32:15–22CrossRefGoogle Scholar
  39. Mollick AV, Assefa TA (2013) U.S. stock returns and oil prices: the tale from daily data and the 2008–2009 financial crisis. Energy Econ 36:1–18CrossRefGoogle Scholar
  40. Ng A (2000) Volatility spillover effects from Japan and the US to the Pacific Basin. J Int Money Financ 19:207–233CrossRefGoogle Scholar
  41. Papapetrou E (2001) Oil price shocks, stock market, economic activity and employment in Greece. Energy Econ 23(5):511–532CrossRefGoogle Scholar
  42. Park J, Ratti RA (2008) Oil price shocks and stock markets in the U.S. & 13 European countries. Energy Econ 30:2587–2608CrossRefGoogle Scholar
  43. Rafiq S, Salim R, Bloch H (2009) Impact of crude oil price volatility on economic activities: an empirical investigation in the Thai economy. Resour Policy 34:121–132CrossRefGoogle Scholar
  44. Royston P (1982) An extension of Shapiro and Wilk’s W test for normality to large samples. Appl Stat 31:115–124CrossRefGoogle Scholar
  45. Sadorsky P (1999) Oil price shocks and stock market activity. Energy Econ 21(5):449–469CrossRefGoogle Scholar
  46. Sadorsky P (2012) Correlations and volatility spillovers between oil prices and the stock prices of clean energy and technology companies. Energy Econ 34:248–255CrossRefGoogle Scholar
  47. Singh P, Kumar B, Pandey A (2010) Price and volatility spillovers across North American, European and Asian stock markets. Int Rev Financ Anal 19:55–64CrossRefGoogle Scholar
  48. Singhal S, Ghosh S (2016) Returns and volatility linkages between international crude oil price, metal and other stock indices in India: evidence from VAR-DCC-GARCH models. Resour Policy 50:276–288CrossRefGoogle Scholar
  49. Wang Y, Wu C (2012) Forecasting energy market volatility using GARCH models: can multivariate models beat univariate models? Energy Econ 34(6):2167–2181CrossRefGoogle Scholar
  50. Worthington A, Higgs H (2004) Transmission of equity returns and volatility in Asian developed and emerging markets: a multivariate GARCH analysis. Int J Financ Econ 9:71–80CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  • Göknur Büyükkara
    • 1
    Email author
  • Onur Enginar
    • 1
  • Hüseyin Temiz
    • 2
  1. 1.Department of FinanceHacettepe UniversityAnkaraTurkey
  2. 2.Department of AccountingSamsun UniversitySamsunTurkey

Personalised recommendations