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Oil and stock markets before and after financial crises : a local Gaussian correlation approach

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  • Georgios Bampinas
  • Theodore Panagiotidis

Abstract

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

Suggested Citation

  • Georgios Bampinas & Theodore Panagiotidis, 2017. "Oil and stock markets before and after financial crises : a local Gaussian correlation approach," Bank of Estonia Working Papers wp2016-11, Bank of Estonia, revised 06 Feb 2017.
    • Handle: RePEc:eea:boewps:wp2016-11
    DOI: 10.23656/25045520/112016/0057
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    More about this item

    Keywords

    stocks; crude oil; nonlinear dependence; financial crisis; contagion; local Gaussian correlation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • F3 - International Economics - - International Finance

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