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Extreme Risk Spillovers between Crude Oil and Stock Markets

id: 2266 Date: 20160218 Times:
Magazines   51 (2015) 455–465
AuthorLimin Du, Yanan He
ContentThis paper investigates the spillovers of extreme risks between crude oil and stock markets using daily data of the S&P 500 stock index and West Texas Intermediate (WTI) crude oil futures returns. Based on the method of Granger causality in risk, Value at Risk (VaR) is employed to measure market risk, and a class of kernel-based tests is used to detect negative and positive risk spillover effects. Empirical results reveal that there are significant risk spillovers between the two markets. Extreme movements, past or current, in one market may have a significant predictive power for those in the other market. Prior to the recent financial crisis, there are positive risk spillovers from stock market to crude oil market, and negative spillovers from crude oil market to stock market. After the financial crisis, bidirectional positive risk spillovers are strengthened markedly. The risk spillovers may occur instantaneously, and/or with a (long) time delay. Both positive and negative risk spillover effects exhibit asymmetric correlations.
JEL-CodesG11 G32 Q43 Q47 C12 C58
KeywordsRisk spillover VaR Financial crisis Crude oil Stock market
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