Conditional Correlations and Volatility Spillovers between Oil Price and OECD Stock index: a Multivariate Analysis

This paper aims to explore the links between Brent crude oil index and stock markets index in OECD countries. We estimate time-varying conditional correlation relationships among these variables by employing a Multivariate Fractionally Integrated Asymmetric, Power ARCH model with dynamic corrected conditional correlations of Engle (1982) M-FIAPARCH-c-DCCE with a Student-t distribution. This process detects eventual volatility spillovers, asymmetries and persistence, which are typically observed in stock markets and oil prices. Our sample consists of monthly frequency stock indexes and oil price, covering 17 OECD countries for the period January, 1990- September, 2012. We find that at the beginning of our sample, oil has offered diversification opportunities with respect to the stock market, but this trend has been reversed in the last decade. We regroup the countries sample in 5 groups which present quite similar patterns of dynamic correlation between oil and their stock market and corroborate our geographical clustering by multivariate correlations among stock markets.