Time-varying Co-Movement And Volatility Transmission Between The Oil Price And Stock Markets In The Baltics And Four European Countries

Murad Bein

Abstract


The paper explores time-varying co-movement and volatility transmission between three Baltic (Estonia, Latvia and Lithuania) stock markets and two international crude oil indices (Brent and West Texas Intermediate (WTI)). It also investigates the relation between two major oil-importing (the EU and the UK) and oil-exporting (Norway and Russia) European countries and the two oil indices. We utilised a long sample period that allows for the examination of the behaviour of the Baltic stock markets in relation to the oil indices prior to the countries’ EU accession. The sample study, which concerns high-frequency data, ran from 3 January 2000 to 18 January 2016. The GARCH family was employed to account for the time-varying study, which yielded several important findings. We found that the Baltics have a positive albeit lower level of time-varying co-movement with the international oil markets. In addition, the results revealed that the impacts of oil shocks in the Baltics are also lower than in the other four European markets. Additionally, among the Baltic countries, we found the Latvian market to be isolated from any shocks in the oil markets. Further, the results showed that the Baltic stock markets provide a higher return, with Estonia having the highest return. Indeed, all the Baltic markets exhibit lower risk than the other European markets. This result has important implications, especially for international investors and oil companies seeking to benefit from risk diversification and hedging techniques. However, this finding is contrary to the existing literature, which argues that the Baltics are integrated. Considering the time-varying and volatility transmission with the oil-importing and oil-exporting countries, we found that there exists high-level time-varying co-movement. We also found that the volatility transmission and the magnitude of shocks from the oil markets are higher in oil-exporting countries.

DOI: http://dx.doi.org/10.5755/j01.ee.28.5.17383


Keywords


Oil price, volatility transmission, stock return, oil shock, dynamic conditional, Baltic stock markets,

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Print ISSN: 1392-2785
Online ISSN: 2029-5839