Dynamic Connectedness between Crude Oil and Equity Markets : What About the Effects of Firm's Solvency and Profitability Positions?
The paper aims to explore the presence of connectedness between crude oil and equity indices of the oil and gas sector by employing the dataset of 22 OECD nations from 1999 to 2020. The analysis, adopting the connectedness approach developed by Diebold and Yilmaz (2012) and the frequency connectedness developed by Baruník and Křehlík (2018), report the high level of connectedness, especially during the extreme economic meltdown. The short-term (1-5 days) level of total connectedness is substantially higher than the medium-term (5-30 days) and long-term levels (30-262 days). When the direction of shock transmission is discovered to be from the equities markets of Canada, the United Kingdom, and the United States to crude oil prices, oil shocks appear to have a significant impact on Japan's oil and gas equity markets. Novel to the literature, we have documented the impact of the firms’ solvency and profitability positions in the regional sectors on the extent of the connectedness between oil and sector equity indices. In particular, firms that have better solvency ratios (lower debt to asset ratio and higher interest coverage) are connected less with the oil shocks. In countries with more international investors (financially open nations), the impact of firm solvency situations on connectedness is even more obvious. Subsequently, the sector returns of the firms that have higher profitability ratios are also affected less from the oil shocks
Year of publication: |
[2022]
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Authors: | Balli, Faruk ; Balli, Hatice Ozer ; Nguyen, Hannah |
Publisher: |
[S.l.] : SSRN |
Saved in:
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