measuring contagion between energy market and stock market during financial crisis a copula approach abstract in this paper we apply time varying copulas to investigate whether a contagion effect existed between energy and stock markets during the recent financial crisis using the wti oil spot price the s p500 index the shanghai stock market composite index and the shenzhen stock market component index returns evidence was found for a significantly increasing dependence between crude oil and stock markets after the failure of lehman brothers thus supporting the existence of contagion in the sense of forbes and rigobon s 2002 definition moreover increased tail dependence and symmetry characterize all the paired markets this indicates that significant increases in tail dependence are an actual dimension of the contagion phenomenon and that crude oil and stock prices are linked to the same degree regardless of whether markets are booming or crashing during the sample period finally the contagion effect is found to be much weaker for china than the us the empirical results have potentially important implications for risk management

do global risk perceptions influence world oil prices abstract this paper investigates the information transmission mechanism between world oil gold silver dollar euro exchange rate markets and volatility index vix accommodating for global risk perceptions we find that there is a unique long run equilibrium relationship where gold silver exchange rate and risk perceptions appear as long run forcing variables of world oil prices we uncover that global risk perceptions have a significantly suppressing effect on oil prices in the long run we also discover that global risk perceptions play a less important role in explaining the forecast error variance of oil prices in the short run than prices in the alternative investment markets our results also suggest that a shock in risk perceptions of global investors have a negative but short lived initial impact on oil prices

power approximation for computing s s policies using service level the paper presents an analytic approximation for computing s s policies for single items under periodic review with fixed ordering costs linear holding costs and a service level requirement the replenishment lead time is fixed and unfilled demand is backlogged the approximation is similar to ehrhardt s power approximation however we do not assume the knowledge of shortage costs which are difficult to estimate in practice we define a service level which measures the average backlog relative to the average demand this quantity is easy to understand and frequently used in practice the resulting power approximation policies are easy to compute and require only knowledge of the mean and variance of demand computational results show that the approximation gives a service level which is within one percentage point of the required service level in most cases furthermore the expected total costs of the approximation taking into consideration a penalty cost for stockouts are well within one percent of optimal

oil and gas markets in the uk evidence from a cointegrating approach the paper examines the relationship between uk wholesale gas prices and the brent oil price over the period 1996 2003 in order to investigate whether oil and gas prices decoupled during this period as orthodox gas market liberalisation theory suggests tests for unit roots and cointegration are carried out and it is discovered that a long run equilibrium relationship between uk gas and oil prices exists moreover this relationship pre dates the opening of the uk mainland europe interconnector following a recursive methodology hansen h and johansen s 1999 some tests for parameter constancy in cointegrated var models econometrics journal 2 306 333 it was found that the cointegrating relationship is present throughout the sample period however the long run solutions seem to be more volatile evidence is provided that the short run relationship is linear and impulse response functions are used to examine the effects that a shock in oil would have on gas these findings do not support the assumption that gas prices and oil prices decouple

financialization in commodity markets a passing trend or the new normal abstract in this paper we show that large inflows into commodity investments a recent phenomenon known as financialization has changed the behavior and dependence structure between commodities and the general stock market the common perception is that the increase in comovements is the result of distressed investors selling both assets during the 2007 2009 financial crisis we show that financial distress alone cannot explain the size and persistence of comovements instead we argue that commodities have become an investment style for institutional investors given that institutional investors continue to target funds into commodities we predict spillovers between commodities and the stock market to remain high in the future

interactions between oil and financial markets do conditions of financial stress matter abstract this study uses a structural threshold var model to study the nonlinear relationships between oil and financial variables the threshold effect is robust across models having different structural orderings of shocks evidence shows that shocks associated with different financial stress regimes explain the asymmetric responses of the system shocks in the stressed regime usually have larger and longer effects than shocks in the normal regime the inverse relationship between real interest rate and real oil price is conditioned on a number of factors and is not robust across all manner of circumstances the relationship between oil price and the us dollar is shock dependent a negative shock that depreciates the dollar may trigger an increase in oil price yet a positive oil shock may lead to appreciation of the dollar finally oil s ability to hedge against rising risk is limited to a market with normal stress conditions it is the us dollar that generally serves as a safe haven when financial markets are enmeshed in considerable tension

index investment and financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become incr

forecasting volatility of the u s oil market abstract we examine the information content of the cboe crude oil volatility index ovx when forecasting realized volatility in the wti futures market additionally we study whether other market variables such as volume open interest daily returns bid ask spread and the slope of the futures curve contain predictive power beyond what is embedded in the implied volatility in out of sample forecasting we find that econometric models based on realized volatility can be improved by including implied volatility and other variables our results show that including implied volatility significantly improves daily and weekly volatility forecasts however including other market variables significantly improves daily weekly and monthly volatility forecasts

causal flows between oil and forex markets using high frequency data asymmetries from good and bad volatility abstract this paper investigates the causal linkages in volatility between crude oil prices and six major bilateral exchange rates against the u s dollar in the time frequency space using high frequency intraday data special attention is paid to the potential asymmetries in the causal effects between oil and forex markets the wavelet based granger causality method proposed by olayeni 2016 is applied to quantify the causal relations in the time and frequency domains simultaneously moreover the realized semivariance approach of barndoff nielsen et al 2010 is used to account for possible asymmetries in the transmission of volatility shocks the empirical results show that the significant causal links between oil prices and exchange rates are mainly concentrated in the long run and during periods of increased economic and financial uncertainty such as the global financial crisis and the subsequent european sovereign debt crisis further the causal effects from currency markets to the crude oil market are stronger than in the opposite direction consistent with the forward looking nature of exchange rates the role of the u s dollar as the key invoicing currency for global oil trading and the expanding financialization of the oil market since the mid 2000s in addition significant asymmetries coming from good and bad volatility are found at longer horizons specifically bad volatility seems to dominate good volatility in terms of the importance of transmission of volatility shocks

index investment and the financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become increasingly correlated with oil prices this trend has been significantly more pronounced for commodities in two popular commodity indices this finding reflects the financialization of the commodity markets and helps explain the large increase in the price volatility of non energy commodities around 2008

speculation in the oil market the run up in oil prices since 2004 coincided with growing investment in commodity markets and increased price co movement among different commodities we assess whether speculation in the oil market played a role in driving this salient empirical pattern we identify oil shocks from a large dataset using a dynamic factor model this method is motivated by the fact that a small scale vector autoregression is not informationally sufficient to identify the shocks the main results are as follows i while global demand shocks account for the largest share of oil price fluctuations speculative shocks are the second most important driver ii the increase in oil prices over the last decade is mainly driven by the strength of global demand however speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse iii the co movement between oil prices and the prices of other commodities is mainly explained by global demand shocks our results support the view that the recent oil price increase is mainly driven by the strength of global demand but that the financialization process of commodity markets also played a role

have commodities become a financial asset evidence from ten years of financialization the financialization of commodity markets over the last decade has changed the behavior of commodity prices in fundamental ways in this paper we uncover the gradual transformation of commodities from a physical to a financial asset although economic demand and supply factors continue to play an important role recent indicators associated with financialization have emerged since 2008 we show that financial variables have become the main driving factors explaining the variation in commodity returns and volatility today our findings have important implications for portfolio analysis and for the effectiveness of hedging in commodity markets

the impacts of structural oil shocks on macroeconomic uncertainty evidence from a large panel of 45 countries abstract using local projection methods this paper employs monthly panel data from 1989 to 2017 to examine both linear and nonlinear impulse responses of macroeconomic uncertainty to structural shocks to global oil production aggregate demand oil market specific demand and speculative demand in a large group of 45 economies we find that both oil supply and demand shocks are important drivers of uncertainty there is strong evidence that the impacts of oil price shocks on macroeconomic uncertainty are regime dependent and contingent on the states of investor sentiments and perceived volatility in financial markets the responses of economic uncertainty to oil shocks especially demand side shocks appear to experience a dramatic change in the post global financial crisis period

the relationship between energy and equity markets evidence from volatility impulse response functions this paper examines the relationship between the energy and equity markets by estimating volatility impulse response functions from a multivariate bekk model of the goldman sach s energy index and the sp in addition we also calculate the time varying conditional correlations and time varying dynamic hedge ratios from volatility impulse response functions we find that low sp however we find only a weak response from s p 500 volatility to energy price shocks moreover our dynamic hedge ratio analysis suggests that the energy index is generally a poor hedging instrument

oil and stock market volatility a multivariate stochastic volatility perspective abstract this paper models the volatility of stock and oil futures markets using the multivariate stochastic volatility structure in an attempt to extract information intertwined in both markets for risk prediction it offers four major findings first the stock and oil futures prices are inter related their correlation follows a time varying dynamic process and tends to increase when the markets are more volatile second conditioned on the past information the volatility in each market is very persistent i e it varies in a predictable manner third there is inter market dependence in volatility innovations that hit either market can affect the volatility in the other market in other words conditioned on the persistence and the past volatility in their respective markets the past volatility of the stock oil futures market also has predictive power over the future volatility of the oil futures stock market finally the model produces more accurate value at risk estimates than other benchmarks commonly used in the financial industry

computing the market price of volatility risk in the energy commodity markets abstract in this paper we demonstrate the need for a negative market price of volatility risk to recover the difference between black scholes black f scholes m 1973 the pricing of options and corporate liabilities journal of political economy 81 637 654 black black f 1976 studies of stock price volatility changes in proceedings of the 1976 meetings of the business and economics statistics section american statistical association pp 177 181 implied volatility and realized term volatility initially using quasi monte carlo simulation we demonstrate numerically that a negative market price of volatility risk is the key risk premium in explaining the disparity between risk neutral and statistical volatility in both equity and commodity energy markets this is robust to multiple specifications that also incorporate jumps next using futures and options data from natural gas heating oil and crude oil contracts over a 10 year period we estimate the volatility risk premium and demonstrate that the premium is negative and significant for all three commodities additionally there appear distinct seasonality patterns for natural gas and heating oil where winter withdrawal months have higher volatility risk premiums computing such a negative market price of volatility risk highlights the importance of volatility risk in understanding priced volatility in these financial markets

does implied volatility provide any information beyond that captured in model based volatility forecasts this paper contributes to our understanding of the informational content of implied volatility here we examine whether the s p 500 implied volatility index vix contains any information relevant to future volatility beyond that available from model based volatility forecasts it is argued that this approach differs from the traditional forecast encompassing approach used in earlier studies the findings indicate that the vix index does not contain any such additional information relevant for forecasting volatility

volatility dynamics for the s p 500 further evidence from non affine multi factor jump diffusions we apply markov chain monte carlo methods to time series data on s p 500 index returns and to its option prices via a term structure of vix indices to estimate 18 different affine and non affine stochastic volatility models with one or two variance factors and where jumps are allowed in both the price and the instantaneous volatility the in sample fit to the vix term structure shows that the second stochastic long term volatility factor is required to fit the vix term structure out of sample tests on the fit to individual option prices as well as in sample tests show that the inclusion of jumps is less important than allowing for non affine dynamics the estimation and testing periods together cover more than 21 years of daily data

risk transmission mechanism between energy markets a var for var approach abstract the global financial crisis gfc of 2007 2009 that originated in the us has revealed the need for measuring and monitoring the transmission of extreme downside market risk this paper investigates the risk transmission mechanism between the oil and natural gas markets we apply the recently introduced test statistics based on cross quantilogram function and the multivariate quantile regression model var for var to the us oil and natural gas prices which are independently formed our results show two asymmetric patterns first the shocks in the oil market substantially increase the value at risk var in the natural gas market but the reverse impact does not exist second we highlight the significant asymmetric response of gains and losses transmission in energy markets cautioning about the underlying weakness of adopting volatility to measure risk in the energy market moreover an extreme market risk is more easily transmitted across markets than moderate risks our results are in general robust in application to other regional energy markets such as europe and asia but the heterogeneities in responses are underpinned by the different role of natural gas in regions the findings in this paper have important implications for academic researchers policy makers in gas dependent economies and business practitioners in light of projected increases in the use of natural gas worldwide as well as the development of independent gas on gas competitive hub prices in asia and europe

how to effectively estimate the time varying risk spillover between crude oil and stock markets evidence from the expectile perspective abstract with the integration and financialization of world economy massive hot money has frequently flowed between crude oil and stock markets and has brought significant extreme risks and their spillover for this reason this paper develops the arch expectile model with embedded conditional autoregressive structure namely car arche model and expectile based var evar approach and investigates the time varying risk spillover between wti futures market and us uk japanese and global stock markets respectively the results indicate that for one thing the evar approach based on car arche model is more adequate than the conventional quantile based var qvar approach based on ged garch for wti and stock markets which is due to the evident advantages of expectile compared to quantile for another the unidirectional downside risk spillover effects from wti to the four stock markets and vice versa are only remarkable during major events and present variations with jumps but the bidirectional downside risk spillover effects between them are significant for each time point during the in sample period which indicate that the simultaneous risk spillover between wti and stock markets are fairly pronounced

risk assessment of oil price from static and dynamic modelling approaches the price gap between west texas intermediate wti and brent crude oil markets has been completely changed in the past several years the price of wti was always a little larger than that of brent for a long time however the price of wti has been surpassed by that of brent since 2011 the new market circumstances and volatility of oil price require a comprehensive re estimation of risk therefore this study aims to explore an integrated approach to assess the price risk in the two crude oil markets through the value at risk var model the var is estimated by the extreme value theory evt and garch model on the basis of generalized error distribution ged the results show that evt is a powerful approach to capture the risk in the oil markets on the contrary the traditional variance covariance vc and monte carlo mc approaches tend to overestimate risk when the confidence level is 95 but underestimate risk at the confidence level of 99 the var of wti returns is larger than that of brent returns at identical confidence levels moreover the ged garch model can estimate the downside dynamic var accurately for wti and brent oil returns

investor sentiment and the stock market s reaction to monetary policy this paper shows that monetary policy decisions have a significant effect on investor sentiment the effect of monetary news on sentiment depends on market conditions bull versus bear market we also find that monetary policy actions in bear market periods have a larger effect on stocks that are more sensitive to changes in investor sentiment and credit market conditions overall the results show that investor sentiment plays a significant role in the effect of monetary policy on the stock market

recent hikes in oil equity market correlations transitory or permanent this paper empirically examines the long run behavior of eight oil equity correlations based on the adcc asymmetric dynamic conditional correlation model and a novel decomposing approach we select equity price indexes from three developed countries the us the uk and germany and five brics member countries brazil russia india china and south africa and consider ten economic financial events for investigation seven correlations exhibit a positively sloped trend and one exhibits a horizontal trend all of these trends have undergone one or two structural breaks which moved the corresponding correlations to their highest ever evolutionary paths these structural breaks are associated with one or more of the ten episodes considered and a common event impacting all eight of the correlation trends is detected to be the 2008 adverse oil shock the broken trends explain why the correlations were low in the early years and high in the recent years our findings indicate that recent hikes in the oil equity correlations are a long run phenomenon

de financialization of commodities evidence from stock crude oil and natural gas markets abstract in order to investigate whether the crude oil and natural gas market volatility is influenced by the volatility in the stock market or whether these different variables move all together we introduce the volatility threshold dynamic conditional correlations vt dcc approach to investigate the spillover effect of stock market volatility index vix vstoxx on crude oil and natural gas markets during 1999 2015 and make the correlation dynamics dependent on conditional variance values through a threshold grid search algorithm by detecting one endogenous break point in the raw series we identify two clusters one in 2008 and another in 2014 due to the financial crisis and the structural low oil prices linked to changing fundamentals respectively also the u s henry hub gas seems to be associated with the stock market volatility indexes contrary to the european nbp gas which is linked to the brent besides regarding the volatility behaviors of our series the four energy variables violate their thresholds at similar moments and the stock market vix and vstoxx exhibit logically similarities co movements are detectable as well between the vix and crude oil series when investigating the volatility extracted from the garch model in addition the block dcc estimates provide ample evidence of similarities in the correlation dynamics between the crude oil and stock volatility series it should be noted that the modeling framework proposed in this paper represents a useful tool for the study of cross market contagion

financialization fundamentals and the time varying determinants of us natural gas prices abstract increasing empirical evidence shows that natural gas prices have decoupled from oil prices yet there remains an open question as to what are the determining factors of natural gas prices following the demise of oil indexation this paper aims to address this question using a dynamic model averaging dma approach dma can help identify key important price determinants and importantly does so within a time varying framework allowing us to document how the set of determinants has evolved in response to key market changes using time series data between 2001 and 2018 we demonstrate a clear declining role of oil prices in the natural gas pricing mechanism verifying the demise of indexation market or fundamental factors such as weather demand and supply conditions have at the same time become more important in addition our results illustrate an increasing role from financial markets captured by speculation related variables providing empirical evidence to support the recent literature on commodity market financialization the rising impact of speculation to natural gas prices introduces questions over how to balance market efficiency and risk management in the post indexation regime

commodity currencies and the real exchange rate abstract this paper examines whether the real exchange rates of commodity exporting countries and the real prices of their commodity exports move together over time using international monetary fund imf data on the world prices of 44 commodities and national commodity export shares we construct new monthly indices of national commodity export prices for 58 commodity exporting countries over 1980 2002 evidence of a long run relationship between national real exchange rate and real commodity prices is found for about one third of the commodity exporting countries the long run real exchange rate of these commodity currencies is not constant as would be implied by purchasing power parity based models but is time varying being dependent on movements in the real price of commodity exports

time varying co movements between energy market and global financial markets implication for portfolio diversification and hedging strategies abstract this study explores the time patterns of volatility spillovers between energy market and stock prices of seven major global financial markets including clean energy energy information technology corporations equity markets and united states economic policy index over the period vary from december 28 2000 to december 31 2018 we employ a time domain connectedness measures of diebold and yilmaz dy 2009 2012 and 2014 to examine spillover mechanism of volatility shocks across future markets optimal weights and hedge ratios are calculated for portfolio diversification and risk management the main findings of the study conclude that oil shocks are exogenous and contribution of oil market volatility to global financial markets is insignificant the returns of world stock index and world energy index are major transmitters of volatility to clean energy market moreover the impact of energy market become strong in global financial market when data is divided into pre during and post financial crisis periods finally the hedge ratios are volatile over time and their maximum value is observed during the financial crisis period of 2008 09 the optimal portfolio between energy and stock prices are heavily weighted to the stock markets

modeling and predicting the cboe market volatility index abstract this paper performs a thorough statistical examination of the time series properties of the daily market volatility index vix from the chicago board options exchange cboe the motivation lies not only on the widespread consensus that the vix is a barometer of the overall market sentiment as to what concerns investors risk appetite but also on the fact that there are many trading strategies that rely on the vix index for hedging and speculative purposes preliminary analysis suggests that the vix index displays long range dependence this is well in line with the strong empirical evidence in the literature supporting long memory in both options implied and realized variances we thus resort to both parametric and semiparametric heterogeneous autoregressive har processes for modeling and forecasting purposes our main findings are as follows first we confirm the evidence in the literature that there is a negative relationship between the vix index and the s p 500 index return as well as a positive contemporaneous link with the volume of the s p 500 index second the term spread has a slightly negative long run impact in the vix index when possible multicollinearity and endogeneity are controlled for finally we cannot reject the linearity of the above relationships neither in sample nor out of sample as for the latter we actually show that it is pretty hard to beat the pure har process because of the very persistent nature of the vix index

u s equity and commodity futures markets hedging or financialization abstract in this paper we investigate the hedging versus the financialization nature of commodity futures vis a vis the equity market using a arma filter based correlation approach our results suggest that while gold futures are typically seen as a hedge against unfavorable fluctuations in the stock market the majority of commodity futures appears to be treated as a separate asset class in line with their increasing financialization our results are robust to the presence of inflation highlight the hedging role played by fuel energy commodity futures in the nineties and reveal that the commodity financialization boosted since the 2000s we also show that gold futures are partially a safe haven for equity investments in the short term but not in the mid term finally we uncover some hedging financialization of crude oil futures associated to global demand oil supply shocks

crude oil commodity or financial asset abstract we examine the relation among daily returns to crude oil prices equity prices and commodity markets by modifying previous efforts in two important ways expanding the model to include the equity price for an oil producing firm conocophillips which ameliorates omitted variable bias and estimating the expanded model using the kalman filter which reduces uncertainty associated with ols estimates from rolling windows consistent with the notion of a commodity price beta for oil industry stocks there is a positive correlation between returns to the spot price of wti and conocophillips this correlation indicates not all price changes in crude oil are expected to persist indeed some of the price reductions associated with the asian financial crisis and the price increase associated with the 2008 price spike are not included in our estimate for long run prices in 2008 q4 the correlations between daily returns to crude oil and equities flip from negative to positive we hypothesize that this flip is triggered by a large reduction in interest rates in the fourth quarter of 2008 which is associated with a reduction in convenience yields and a change from backwardation to contango in futures markets these changes increase the returns to holding crude oil as a financial asset relative to holding oil as a commodity

volatility spillovers between crude oil and chinese sectoral equity markets evidence from a frequency dynamics perspective abstract we examine the frequency dynamics of volatility spillovers between crude oil and china s stock markets in a spectral representation framework of generalized forecast error variance decomposition using sectoral stock indices data we find evidence of total volatility spillover driven mainly by short term spillovers the net spillovers of the oil market are almost all positive and dominated by short ter m components although the spillover during china s 2015 financial crisis is negative and attributable to long term components in addition there exists heterogeneity in net pairwise frequency spillovers between the oil and sectoral stock markets moreover structural breaks in volatilities appear to be a significant feature of volatility spillovers finally frequency spillovers in our system can predict future stock market volatility these results have economic implications for investors and policymakers

vix option pricing and cboe vix term structure a new methodology for volatility derivatives valuation abstract this study integrates cboe vix term structure and vix futures to simplify vix option pricing in multifactor models exponential and hump volatility functions with one to three factor models of the vix evolution are used to examine their pricing for vix options across strikes and maturities the results show that using exponential volatility functions presents an effective choice as pricing models for vix calls whereas hump volatility functions provide efficient out of sample valuation for most vix puts in particular with deep in the money and deep out of the money pricing errors for calls can be further reduced with a two factor model

transmission of shocks and contagion from u s to mena equity markets the role of oil and gas markets abstract using a multifactor model augmented with oil and gas returns this paper examines contagion from the us to mena equity markets and studies the role of energy price fluctuations in amplifying the dependence between the us and mena equity markets we provide empirical evidence of a strong contagion effect originating from the us to mena equity markets the regional oil and gas factors account for the bulk of the variance of the mena equity returns and our findings suggest that the oil and gas markets play an important role in strengthening the dependence between the mena and us markets during episodes of market turmoil we discuss the policymaking importance of our results and propose a strategy to curb the adverse effects of us return shocks on mena equity markets during episodes of stress