11/2016 Georgios Bampinas, Theodore Panagiotidis. Oil and stock markets before and after financial crises: A local Gaussian correlation approach


Working Papers of Eesti Pank 11/2016

The effect of financial shocks on the cross-market linkages between oil prices, both spot and future, and stock markets is examined for four crises: the Mexican crisis of 1994, the Asian crisis of 1997, the dot.com bubble of 2000 and the global financial crisis of 2007–09. By employing the local Gaussian correlation approach introduced in Tjøstheim and Hufthammer (2013), which captures asymmetries and the intrinsic nonlinearity of the relationship, we find that the two markets were regionalised for most of the 1990s and the early 2000s. Flight from stocks to oil occur in all crisis episodes under extreme market conditions, except the recent global financial crisis. During the latter, evidence of higher correlation between the two markets throughout the spectrum emerges and this is more pronounced in the state of financial distress (in the left tail). The view that stock and oil markets behave like ’a market of one’ after the financialisation of commodities is further supported by the presence of contagion between US stock markets and all the benchmark crude oil markets. Finally, our empirical results provide evidence of nonlinear and asymmetric dependence between oil and stock markets during all financial crisis periods.

JEL Codes: G01, G10, F3

DOI: 10.23656/25045520/112016/0057

Keywords: stocks, crude oil, nonlinear dependence, financial crisis, contagion, local Gaussian correlation

Corresponding authors e-mail address: tpanag [at] uom.gr

The views expressed are those of the authors, and do not necessarily represent the official views of the Bank of Estonia or other part of the Eurosystem.

We would like to thank Tairi Rõõm, Lenno Uusküla, Juan Carlos Cuestas, Karsten Staehr, Dimitrios Thomakos, and seminar participants in Eesti Pank and the EEFS 2016 Conference in Amsterdam for their useful comments and suggestions. Theodore Panagiotidis is gratefully acknowledges the hospitality of the Economics and Research Department of Eesti Pank (Bank of Estonia). The usual disclaimer applies.