DEPARTMENT OF ECONOMICS AND FINANCE COLLEGE OF BUSINESS AND ECONOMICS UNIVERSITY OF CANTERBURY CHRISTCHURCH, NEW ZEALAND

Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns

Roengchai Tansuchat, Chia-Lin Chang, Michael McAleer

WORKING PAPER
No. 4/2010

Department of Economics and Finance College of Business and Economics University of Canterbury Private Bag 4800, Christchurch New Zealand

WORKING PAPER No. 4/2010
Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns

Roengchai Tansuchat1, Chia-Lin Chang2, Michael McAleer3 January, 2010 Abstract: This paper investigates the conditional correlations and volatility spillovers between crude oil returns and stock index returns. Daily returns from 2 January 1998 to 4 November 2009 of the crude oil spot, forward and futures prices from the WTI and Brent markets, and the FTSE100, NYSE, Dow Jones and S&P500 index returns, are analysed using the CCC model of Bollerslev (1990), VARMA-GARCH model of Ling and McAleer (2003), VARMA-AGARCH model of McAleer, Hoti and Chan (2008), and DCC model of Engle (2002). Based on the CCC model, the estimates of conditional correlations for returns across markets are very low, and some are not statistically significant, which means the conditional shocks are correlated only in the same market and not across markets. However, the DCC estimates of the conditional correlations are always significant. This result makes it clear that the assumption of constant conditional correlations is not supported empirically. Surprisingly, the empirical results from the VARMA-GARCH and VARMA-AGARCH models provide little evidence of volatility spillovers between the crude oil and financial markets. The evidence of asymmetric effects of negative and positive shocks of equal magnitude on the conditional variances suggests that