Structural change in the link between oil and the European stock market: implications for risk management
The relationship between the European stock market and the crude oil depends on the significance of the different industries in the European economy. The literature points to a structural change after the 2008 crisis without getting into details of which sectors lead this regime switch. The co-movem...
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| Format: | Article |
| Language: | English |
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De Gruyter
2019-05-01
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| Series: | Dependence Modeling |
| Subjects: | |
| Online Access: | https://doi.org/10.1515/demo-2019-0004 |
| _version_ | 1818735737367953408 |
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| author | Ferreiro Javier Ojea |
| author_facet | Ferreiro Javier Ojea |
| author_sort | Ferreiro Javier Ojea |
| collection | DOAJ |
| description | The relationship between the European stock market and the crude oil depends on the significance of the different industries in the European economy. The literature points to a structural change after the 2008 crisis without getting into details of which sectors lead this regime switch. The co-movement between oil prices and stock market is known to exhibit (1) non-linearity, (2) asymmetric tail dependence and (3) variation over time. I combine a copula approach with Switching Markov models to capture this complex linkage while the CoVaR measure translates the consequences of the tail dependence into potential losses. The results indicate a change in the lower tail dependence from negative to positive association between oil and Eurostoxx, meaning a shift in the exposure of our stock portfolio to commodity risk. There is a structural change in dependence after the 2008 financial crisis led by energy-intensive sector, e.g. basic materials and consumer goods. The economic cycle and its implications for profit margin and oil demand might explain this switch. Healthcare sector responds to oil shocks in an opposite way than Eurostoxx, displaying useful features to reduce the exposure of the stock portfolio to oil spillovers. |
| first_indexed | 2024-12-18T00:26:01Z |
| format | Article |
| id | doaj.art-1e29532753eb44b89e251d7362684152 |
| institution | Directory Open Access Journal |
| issn | 2300-2298 |
| language | English |
| last_indexed | 2024-12-18T00:26:01Z |
| publishDate | 2019-05-01 |
| publisher | De Gruyter |
| record_format | Article |
| series | Dependence Modeling |
| spelling | doaj.art-1e29532753eb44b89e251d73626841522022-12-21T21:27:15ZengDe GruyterDependence Modeling2300-22982019-05-01715312510.1515/demo-2019-0004demo-2019-0004Structural change in the link between oil and the European stock market: implications for risk managementFerreiro Javier Ojea0Complutense University of Madrid and European Central Bank. Directorate Macroprudential Policy and Financial Stability, European Central Bank, Sonnemannstrasse 20, 60322Frankfurt, GermanyThe relationship between the European stock market and the crude oil depends on the significance of the different industries in the European economy. The literature points to a structural change after the 2008 crisis without getting into details of which sectors lead this regime switch. The co-movement between oil prices and stock market is known to exhibit (1) non-linearity, (2) asymmetric tail dependence and (3) variation over time. I combine a copula approach with Switching Markov models to capture this complex linkage while the CoVaR measure translates the consequences of the tail dependence into potential losses. The results indicate a change in the lower tail dependence from negative to positive association between oil and Eurostoxx, meaning a shift in the exposure of our stock portfolio to commodity risk. There is a structural change in dependence after the 2008 financial crisis led by energy-intensive sector, e.g. basic materials and consumer goods. The economic cycle and its implications for profit margin and oil demand might explain this switch. Healthcare sector responds to oil shocks in an opposite way than Eurostoxx, displaying useful features to reduce the exposure of the stock portfolio to oil spillovers.https://doi.org/10.1515/demo-2019-0004conditional measuresoil priceseuropean industriesspilloverswitching markov regimecopulastress test91g5091g6091b3091b8462m05 |
| spellingShingle | Ferreiro Javier Ojea Structural change in the link between oil and the European stock market: implications for risk management Dependence Modeling conditional measures oil prices european industries spillover switching markov regime copula stress test 91g50 91g60 91b30 91b84 62m05 |
| title | Structural change in the link between oil and the European stock market: implications for risk management |
| title_full | Structural change in the link between oil and the European stock market: implications for risk management |
| title_fullStr | Structural change in the link between oil and the European stock market: implications for risk management |
| title_full_unstemmed | Structural change in the link between oil and the European stock market: implications for risk management |
| title_short | Structural change in the link between oil and the European stock market: implications for risk management |
| title_sort | structural change in the link between oil and the european stock market implications for risk management |
| topic | conditional measures oil prices european industries spillover switching markov regime copula stress test 91g50 91g60 91b30 91b84 62m05 |
| url | https://doi.org/10.1515/demo-2019-0004 |
| work_keys_str_mv | AT ferreirojavierojea structuralchangeinthelinkbetweenoilandtheeuropeanstockmarketimplicationsforriskmanagement |