Spillover effect

Engineering

Volatility (finance)

Stock (firearms)

Biology

Statistics

Multivariate statistics

Microeconomics

Bivariate analysis

Stock market

Portfolio

Economics

Paleontology

Mechanical engineering

Mathematics

Monetary economics

Econometrics

Stochastic volatility

Horse

Financial economics

Autoregressive conditional heteroskedasticity

Oil price

Univariate

Global Finance Journal

This paper employs univariate and bivariate GARCH models to examine the volatility of oil prices and US stock market prices incorporating structural breaks using daily data from July 1, 1996 to June 30, 2013. We endogenously detect structural breaks using an iterated algorithm and incorporate this information in GARCH models to correctly estimate the volatility dynamics. We find no volatility spillover between oil prices and US stock market when structural breaks in variance are ignored in the model. However, after accounting for structural breaks in the model, we find strong volatility spillover between the two markets. We compute optimal portfolio weights and dynamic risk minimizing hedge ratios to highlight the significance of our empirical results which underscores the serious consequences of ignoring these structural breaks. Our findings are consistent with the notion of cross-market hedging and sharing of common information by financial market participants in these markets.

Volatility spillovers between oil prices and the stock market under structural breaks