Oil Price Systemic Risk for the Oil and Gas Industry: A Copula-CoVaR Approach

Abstract

This paper contributes to the literature on the relationship between crude oil prices and financial markets. Copula models are used in order to investigate the time-varying and asymmetric dependence structure between oil prices and stock prices of oil and gas companies. In addition, the concept of conditional value- at-risk (CoVaR) is used in order to quantify the oil price systemic risk for the oil and gas sector companies in different countries. The approaches applied in this paper are very flexible and allow one to capture dynamic, non-linear, in particular asymmetric, relationships. This seems reasonable as oil price behaviour as such, the underlying causes for price movements as well as the way financial markets react to oil price movements changes over time. A newly proposed marginal model is found to outperform traditional approaches. In addition, there is evidence of time-varying and asymmetric dependence structures. Finally, both upside and downside oil price risk are found to be significant. Thus, our results show the different impacts of oil prices on the stock prices of oil and gas companies in different countries which allows investors of oil and gas industry to construct global diversified portfolios to hedge the oil price systemic risk optimally. In addition, governments in different countries can make policy decisions for adjusting their international oil trade strategy to optimize the revenues of domestic oil and gas companies in order to optimising tax revenues.