Volatility spillover between energy and financial markets
Abstract: This talk examines whether a volatility/risk transmission exists between world energy and the US financial markets during the pre-, the in-, and the post-2008 crisis periods by employing world oil prices and Cleveland financial stress index. It also explores causal dynamics and derives the impulse response functions for the volatility and the level shocks. The volatility structure (the GARCH model estimations) of oil prices and financial stress index works against each other; but both oil prices and financial stress are dominated by long-run volatility. The volatility spillover test developed by Hafner and Herwartz (2006) provides evidence of risk transfer from energy markets to financial markets before the crisis, but from financial markets to energy markets after the crisis. In contrast, the Toda-Yamamoto Granger causality test indicates causality from oil prices to financial stress after the crisis and from financial stress to oil prices in the crisis. The impulse response analysis for the variance shocks indicates a similar volatility transmission pattern before and after the crisis although it is characterized by higher effects and long-lived structure in the crisis. Although all the impulse-response functions for the volatility are initially significant for all sub samples, the functions for level series are significant only in the post-crisis period.