To What Extent Crude Oil, International Stock Markets and Exchange Rates Are Interdependent in Emerging and Developed Countries?

Abstract

Investors in stock markets under react to oil price changes in the short run. As a consequence changes in oil prices predict future stock market and exchange rates returns. Recent volatility in crude oil prices has affected economies around the world, especially the US, which is the largest consumer of oil. This paper uses monthly crude oil, stock indexes and exchange rates prices data from April 2003 until December 2014 to test and model the international markets’ volatility in both emerging and developed countries. Trivariate BEKK GARCH (1, 1) model and statistical tests show several co-movements and interactions between international stock markets, exchange rates and crude oil.

Keywords: volatility spillovers, international markets, Granger causality test, variance decomposition, Trivariate GARCH BEKK (1, 1).