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Spillovers and tail dependence between oil and US sectoral stock markets before and during  COVID-19 pandemic

Walid Mensi (Department of Economics and Finance, College of Economics and Political Science, Sultan Qaboos University, Muscat, Oman) (Institute of Business Research, University of Economics, Ho Chi Minh City, Vietnam)
Waqas Hanif (CEFAGE - Center for Advanced Studies in Management and Economics, University of Algarve, Faro, Portugal) (Department of Management Sciences, COMSATS University Islamabad, Attock Campus, Attock, Pakistan)
Elie Bouri (School of Business, Lebanese American University, Beirut, Lebanon)
Xuan Vinh Vo (Institute of Business Research and CFVG, University of Economics, Ho Chi Minh City, Vietnam)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 28 February 2023

249

Abstract

Purpose

This paper examines the extreme dependence and asymmetric risk spillovers between crude oil futures and ten US stock sector indices (consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, telecommunication and utilities) before and during COVID-19 outbreak. This study is based on the rationale that stock sectors exhibit heterogeneity in their response to oil prices depending on whether they are classified as oil-intensive or non-oil-intensive sectors and the possible time variation in the dependence and risk spillover effects.

Design/methodology/approach

The authors employ static and dynamic symmetric and asymmetric copula models as well as Conditional Value at Risk (VaR) (CoVaR). Finally, they use robustness tests to validate their results.

Findings

Before the COVID-19 pandemic, crude oil returns showed an asymmetric tail dependence with all stock sector returns, except health care and industrials (materials), where an average (symmetric tail) dependence is identified. During the COVID-19 pandemic, crude oil returns exhibit a lower tail dependency with the returns of all stock sectors, except financials and consumer discretionary. Furthermore, there is evidence of downside and upside risk asymmetric spillovers from crude oil to stock sectors and vice versa. Finally, the risk spillovers from stock sectors to crude oil are higher than those from crude oil to stock sectors, and they significantly increase during the pandemic.

Originality/value

There is heterogeneity in the linkages and the asymmetric bidirectional systemic risk between crude oil and US economic sectors during bearish and bullish market conditions; this study is the first to investigate the average and extreme tail dependence and asymmetric spillovers between crude oil and US stock sectors.

Keywords

Acknowledgements

The corresponding author is pleased to acknowledge financial support from Fundação para a Ciência e a Tecnologia (Grant UIDP/04007/2020). The last author is pleased to acknowledge financial support from University of Economics Ho Chi Minh City, Vietnam.

Citation

Mensi, W., Hanif, W., Bouri, E. and Vo, X.V. (2023), "Spillovers and tail dependence between oil and US sectoral stock markets before and during  COVID-19 pandemic", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-12-2021-1799

Publisher

:

Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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