Research Information System
in: Risk Factors and Contagion in Commodity Markets and Stocks Markets, Goutte Stéphane,Guesmi Khaled, Editor, World Scientific Publishing , New Jersey, pp.83-120, 2020
Abstract: This study examines the correlation structures
between oil futures, the S&P500 and US sectoral indices, using the
Asymmetric DCC method. The results indicate that these correlations display
time-varying and asymmetric characteristics. The potential effects of various
factors, including copper and gold prices, dollar/euro exchange rate, T-bill
rate and financial stress index on these dynamic correlations are also
investigated. The dynamic links between
oil and stock returns weaken in response to shocks in all factors we examine,
except for financial stress index and short-term interest rates. Similar to
previous studies, we find that during financial distress episodes, correlations
tend to strengthen. Furthermore, we are interested in whether the increases in
correlations are temporary or persistent in nature, as this would contain
important information for hedging
strategies. The findings indicate that prior to the 2008 global financial
crisis, the increases were more temporary in nature, whereas after this crisis
they display more persistent behavior. We find that the Cleveland Financial
Stress Index (CFSI) captures a long-term increase in correlations, since an
increase in the CFSI post-2008 leads to a surge in correlations, but not in
pre-2008. Hence, investors should definitely follow CFSI to gain benefits of diversification in commodity
markets.