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Return and Volatility Spillover from Oil to Equity Market

Lundgren, Andreas LU (2011) NEKM09 20111
Department of Economics
Abstract
In this essay a four stage GJR-GARCH(1,1) model is applied to test the presence of both return and volatility spillover to the European market from the oil market. The GJR-GARCH-model allow for asymmetric effects to be present in the country specific stock market. This four step model is applied to eight European countries and allow for spillover effects from oil market, US market and European market. The presence of oil spillover is found significant in all markets except for Ireland. A strong trend is that the shocks towards each country seem to have a more significant effect than the return spillover. Indicating that unexpected changes affect more than expected. To test the impact of shocks on the volatility a variance decomposition is... (More)
In this essay a four stage GJR-GARCH(1,1) model is applied to test the presence of both return and volatility spillover to the European market from the oil market. The GJR-GARCH-model allow for asymmetric effects to be present in the country specific stock market. This four step model is applied to eight European countries and allow for spillover effects from oil market, US market and European market. The presence of oil spillover is found significant in all markets except for Ireland. A strong trend is that the shocks towards each country seem to have a more significant effect than the return spillover. Indicating that unexpected changes affect more than expected. To test the impact of shocks on the volatility a variance decomposition is performed and the variance ratios for the spillover are calculated. All average variance ratios from oil market are found to be smaller than 1% except for Denmark (1,315%) and Norway (7,846%).
A model that allow for asymmetric effects is also estimated, by separating the spillover effects into positive and negative values. Since oil prices increases would be expected to have a more significant effect on the economy. Some evidence of this asymmetry is found, although most countries seem to respond symmetric to oil price movements. Another extension is to allow for the oil spillovers to be time-varying in response to interest rates and industrial production. Although the effects from both are found significant in only a few markets. (Less)
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author
Lundgren, Andreas LU
supervisor
organization
course
NEKM09 20111
year
type
H3 - Professional qualifications (4 Years - )
subject
keywords
Return Spillover, Volatility Spillover, Oil Volatility, Oil Returns, GJR-GARCH, Asymmetric Oil Effects.
language
English
id
2153301
date added to LUP
2011-09-27 10:24:12
date last changed
2011-09-27 10:24:12
@misc{2153301,
  abstract     = {In this essay a four stage GJR-GARCH(1,1) model is applied to test the presence of both return and volatility spillover to the European market from the oil market. The GJR-GARCH-model allow for asymmetric effects to be present in the country specific stock market. This four step model is applied to eight European countries and allow for spillover effects from oil market, US market and European market. The presence of oil spillover is found significant in all markets except for Ireland. A strong trend is that the shocks towards each country seem to have a more significant effect than the return spillover. Indicating that unexpected changes affect more than expected. To test the impact of shocks on the volatility a variance decomposition is performed and the variance ratios for the spillover are calculated. All average variance ratios from oil market are found to be smaller than 1% except for Denmark (1,315%) and Norway (7,846%). 
A model that allow for asymmetric effects is also estimated, by separating the spillover effects into positive and negative values. Since oil prices increases would be expected to have a more significant effect on the economy. Some evidence of this asymmetry is found, although most countries seem to respond symmetric to oil price movements. Another extension is to allow for the oil spillovers to be time-varying in response to interest rates and industrial production. Although the effects from both are found significant in only a few markets.},
  author       = {Lundgren, Andreas},
  keyword      = {Return Spillover,Volatility Spillover,Oil Volatility,Oil Returns,GJR-GARCH,Asymmetric Oil Effects.},
  language     = {eng},
  note         = {Student Paper},
  title        = {Return and Volatility Spillover from Oil to Equity Market},
  year         = {2011},
}