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Does Crude Oil Price Volatility Pass on the Stock Market? Evidence from a Global Perspective

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Does Crude Oil Price Volatility Pass on the Stock Market? Evidence from a Global Perspective Does Crude Oil Price Volatility pass on the Stock Market? Evidence from a Global Perspective. Kilintari Sofia SID: 3302120028 SCHOOL OF SCIENCE & TECHNOLOGY A thesis submitted for the degree of Master of Science (MSc) in Energy Systems DECEMBER 2013 THESSALONIKI-GREECE 1 Does Crude Oil Price Volatility pass on the Stock Market? Evidence from a Global Perspective. Kilintari Sofia SID: 3302120028 SCHOOL OF SCIENCE & TECHNOLOGY A thesis submitted for the degree of Master of Science (MSc) in Energy Systems Supervisor: Dr. T. Dergiades Supervising Committee Members: DECEMBER 2013 THESSALONIKI-GREECE 2 Does Crude Oil Price Volatility pass on the Stock Market? Evidence from a Global Perspective. By Kilintari Sofia Abstract The present dissertation study investigates empirically the volatility spillover from oil prices to stock markets from a global perspective. The crude oil volatility will be identified through the newly published CBOE Crude Oil Volatility Index (OVX) while at the same time global stock markets will be examined through global stock indexes such as MSCI ACWI, BBC Global 30, Dow Jones Global Titans, FTSE Global100, Global Dow, S&P Global Net Return, S&P Global 1200. For the purpose of this study, we use daily time series data which have been retrieved from the Blooomberg database. The preliminary econometric analysis begins with unit root and stationarity tests in order to test the order of integration of variables and proceeds with cointegration tests. To examine the interrelationship between the variables of interest advance causality techniques were applied. Firstly, the traditional Granger causality test and Todo-Yamamoto causality test were implemented to reveal the linear causality. Secondly, frequency domain causality tests were applied to reveal the nonlinear interaction. More precisely, Breitung and Candelon (2006) model was used to explore the long and short run causality, as well as the Lemmens et al (2008) approach. The identification of the causal relationship is of paramount importance for a financial hedger, policy maker or market participant. 3 4 Contents 1. Introduction ..........................................................................................................................12 2. Review of the Literature .......................................................................................................16 3. Methodological Framework .................................................................................................26 3.1 Unit Root Tests ...............................................................................................................26 3.1.1 The Augmented Dickey-Fuller test ...........................................................................26 3.1.2 The Generalized Least Squares Augmented Dickey-Fuller test ..............................27 3.1.3 The Phillips and Perron test.....................................................................................29 3.2 Stationarity testing ..........................................................................................................29 3.2.1 Kwiatkowski-Phillips-Schmidt-Shin test...................................................................29 3.3 Cointegration Tests, VAR and VECM............................................................................31 3.3.1 The Engle and Granger Cointegration Test ............................................................31 3.3.2 The Phillips-Ouliaris Cointegration Test.................................................................32 3.3.3 The Johansen Cointegration Test.............................................................................33 3.3.4 The Vector Auto Regression (VAR) and Vector Error Correction (VEC) Models ...............................................................................................................................35 3.4 Causality Tests ................................................................................................................37 3.4.1 Granger causality.....................................................................................................37 3.4.2 Toda-Yamamoto causality test .................................................................................38 3.5 Frequency Domain Causality Tests.................................................................................39 3.5.1 Breitung and Candelon (2006) test ..........................................................................39 3.5.2 Lemmens et al (2008)test..........................................................................................41 4. Data Sources and Empirical Application..............................................................................45 4.1 Data Sources....................................................................................................................45 4.2 Preliminary Econometric Analysis..................................................................................50 4.2.1 Unit Root and Stationarity testing results ................................................................50 4.2.2 Cointegration testing results ....................................................................................54 4.3 Linear Causality testing...................................................................................................57 4.4 Frequency Domain Causality testing ..............................................................................58 4.4.1 Causality testing in the first logarithmic differences (pre-filtered series) ...............59 5 4.4.2 Causality testing in the residuals .............................................................................66 5. Concluding Remarks ............................................................................................................74 6. References ............................................................................................................................77 6 Tables Table 1: ADF unit root test results............................................................................................50 Table 2: GLS-DF unit root test results.....................................................................................51 Table 3: PP unit root test results ...............................................................................................52 Table 4: KPSS stationarity test results......................................................................................53 Table 5: The Engle and Granger Cointegration test .................................................................54 Table 6: The Phillips and Ouliaris Cointegration test...............................................................55 Table 7: The Johansen cointegration test..................................................................................56 Table 8: Linear Granger Causality test ....................................................................................57 Table 9: The Toda- Yamamoto Causality test .........................................................................58 Table 10: Causality Testing Results .........................................................................................74 7 Figures Figure 1: WTI spot prices .........................................................................................................13 Figure 2: OVX .........................................................................................................................14 Figure 3: OVX Index ................................................................................................................45 Figure 4: OVX Index growth rate.............................................................................................45 Figure 5: ACWI Index ..............................................................................................................46 Figure 6: ACWI Index Change.................................................................................................46 Figure 7: BBC Index.................................................................................................................47 Figure 8: BBC Index Change....................................................................................................47 Figure 9: DJGT Index ...............................................................................................................47 Figure 10: DJGT Index Change................................................................................................47 Figure 11: FTSE 100 Index.......................................................................................................48 Figure 12: FTSE 100 Index Change .........................................................................................48 Figure 13: GDOW Index ..........................................................................................................48 Figure 14: GDOW Index Change .............................................................................................48 Figure 15: SP100 Index ............................................................................................................49 Figure 16: SP100 Index Change ...............................................................................................49 Figure 17: SP1200 Index ..........................................................................................................49 Figure 18: SP1200 Index Change .............................................................................................49
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