Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries

• Published in: International review of financial analysis Vol. 20; no. 3; pp. 152 - 164
• Main Authors: Filis, George, Degiannakis, Stavros, Floros, Christos
• Format: Journal Article
• Language: English
• Published: Greenwich Elsevier Inc 01-06-2011; Elsevier; Elsevier Science Ltd
• Series: International Review of Financial Analysis
• Subjects: Correlation analysis; Crude oil prices; DCC-GARCH; Dynamic correlation; Economic crisis; Oil price shocks; Oil prices; Oil prices Oil price shocks Stock market returns DCC-GARCH Dynamic correlation; Securities markets; Stochastic models; Stock exchanges; Stock market returns; Stock prices; Studies; Brazil; Canada; Mexico; Netherlands; United States > US; Germany; Oil prices; C5; Dynamic correlation; Q4; Oil price shocks; G1; DCC-GARCH; Stock market returns
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2011.02.014

The paper investigates the time-varying correlation between stock market prices and oil prices for oil-importing and oil-exporting countries. A DCC-GARCH-GJR approach is employed to test the above hypothesis based on data from six countries; Oil-exporting: Canada, Mexico, Brazil and Oil-importing: USA, Germany, Netherlands. The contemporaneous correlation results show that i) although time-varying correlation does not differ for oil-importing and oil-exporting economies, ii) the correlation increases positively (negatively) in respond to important aggregate demand-side (precautionary demand) oil price shocks, which are caused due to global business cycle's fluctuations or world turmoil (i.e. wars). Supply-side oil price shocks do not influence the relationship of the two markets. The lagged correlation results show that oil prices exercise a negative effect in all stock markets, regardless the origin of the oil price shock. The only exception is the 2008 global financial crisis where the lagged oil prices exhibit a positive correlation with stock markets. Finally, we conclude that in periods of significant economic turmoil the oil market is not a “safe haven” for offering protection against stock market losses.