Dynamic Interrelationship and Volatility Spillover among Sustainability Stock Markets, Major European Conventional Indices, and International Crude Oil

Basel Maraqa,Murad Bein

doi:10.3390/su12093908

Abstract

This study examines the dynamic interrelationship and volatility spillover among stainability stock indices (SSIs), international crude oil prices and major stock returns of European oil-importing countries (UK, Germany, France, Italy, Switzerland and The Netherlands) and oil-exporting countries (Norway and Russia). We employ the DCC-MGARCH model and use daily data for the sample period from 28 September 2001 to 10 January 2020. We find that the dynamic interrelationship between SSIs, stock returns of European oil importing/exporting countries and oil markets is different. There is higher correlation between SSIs and oil-importing countries, while oil-exporting countries have higher correlation with the oil market. Notably, the correlation between oil and stock returns became higher during and after the global financial crisis. This study also reveals the existence of significant volatility spillover between sustainability stock returns, international oil prices and the major indices of oil importing/exporting countries. These results have important implications for investors who are seeking to hedge and diversify their assets and for socially responsible investors.

Highlights

The dependence on energy of both emerging and developed economies indicates that oil price shocks have a significant impact on the variables of a country’s economics [1]
We employed the dynamic conditional correlation (DCC)-Multivariate Generalized Autoregressive Conditional Heteroscedasticity (MGARCH) model created by Engle [62]; this model is compatible for controlling endogeneity, heteroscedasticity and omitted variable bias [63]
The shock squared term in the variance equation is statistically significant, which means the lagged volatility and current news immediately reflect the price of the index

Summary

Introduction

The dependence on energy of both emerging and developed economies indicates that oil price shocks have a significant impact on the variables of a country’s economics [1]. SRI excludes investment activities related to tobacco, weapons and gambling [6,11] This type of socially conscious investing attracts many investors; they believe investing in companies that adhere to sustainability standards creates new value in the long term and such investing is considered safer in that it avoids risks resulting from environmental and social developments [11]. This study analyses the dynamic interrelationship and volatility spillover among crude oil prices and conventional stock markets represented by major indices for European oil-importing countries (UK, Germany, France, Italy, Switzerland and the Netherlands) and oil-exporting countries (Norway and Russia) and the SRI stock return. To investigate the dynamic interrelationship and volatility spillover between crude oil prices, DJSI-W, DJSI-E and major stock indices of European oil-importing/exporting countries, We employed Dynamic Conditional Correlation (DCC)-Multivariate Generalized Autoregressive Conditional Heteroscedasticity (MGARCH), using daily data for the sample period of the study (28 September 2001 to 10 January 2020). The organization of this article is as follows: Section 2 is devoted to a literature review, Section 3 contains the data and methodology, Section 4 presents the empirical results and Section 5 draws conclusions

Literature Review

Data and Methodology

Descriptive Statistics and Primary Analysis

Methodology and Model Specification

Empirical Results and Discussion

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