This paper examines the influence oil prices on stock market time-varying correlation. We consider five stock market indices from both oil-importing (US, UK and Germany) and oil-exporting economies (Canada and Norway) for the period 1988-2011. The findings from the DCC-GARCH framework suggest that the effects of oil price changes on stock market correlation are not constant over time and they depend on the status of the economy, i.e. whether it is oil-importing or oil-exporting. In addition, utilising the identification of oil price shocks by Kilian (2009) and Hamilton (2009a; 2009b) we find that the aggregate demand shocks and precautionary demand shocks tend to exercise a negative effect on stock market correlation, whereas no effects from the supply-side oil price shocks can be reported. These findings have important implications for international portfolio diversification and risk management.
Österreichische Systematik der Wissenschaftszweige (ÖFOS)
- 502010 Finanzwissenschaft