Abstract
The goal of this paper is to check existence of Granger causality in risk between eleven European stock markets and crude oil market. We analyze bidirectional instantaneous and delayed Granger causality in tails test results, i.e. whether occurrence of the extreme returns on the crude oil market precede similar events on the main European stock markets and vice versa. Using Brent futures prices and main stock indices in Europe (Belgium, France, Germany, Greece, Italy, Netherlands, Norway, Poland, Spain, Sweden and United Kingdom), we apply testing procedure developed by Candelon and Tokpavi (2016). The main conclusion is that in the vast majority of cases instantaneous causality in tails was symmetrical. We also found that more long-lived reaction appeared as a result to the negative news from the oil market and from the stock markets.
Highlights
Crude oil is a unique commodity, crucial for the global economy
We propose to apply Candelon and Tokpavi (2016) test to detect the existence of extreme risk spillover between oil market and stock markets in Europe
An extreme risk spillover test between crude oil and main European stock markets is applied in this article
Summary
Crude oil is a unique commodity, crucial for the global economy. Investors and market participants closely monitor the price of oil. This price is a crucial factor for importers and exporters. Oil dependent companies in importing countries bear higher costs when the price increases. Oil producers monitor oil futures price, which can vary as a result of changing demand. When the economy slows down and oil-using industries are in crisis, it may lead to a lower oil demand. Unexpected jumps in oil futures price could be treated by market participants as a signal of a changing economic condition. Investors from oil importing or exporting countries can have different opinions about a possible effect of raising or falling oil price on their national economy
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