Providing a Network for Measuring the Dynamics Volatility Connectedness of Oil and Financial Markets

Nasser Gholami,Teymor Mohammadi,Hamid Amadeh,Morteza Khorsandi

doi:10.29252/jist.8.31.149

Abstract

Various studies have shown that markets are not separated and that fluctuations in different markets affect each other. Therefore, awareness of connectedness is needed for investors and policymakers for making appropriate decisions. The aim of this paper is to measure the dynamics connectedness of selected stock markets in the Middle East, oil markets, gold, the dollar index, and euro-dollar and pound-dollar exchange rates during the period February 2007 to August 2019 in networks with different weekly horizons. In this paper, we intend to evaluate the pairwise impact of crude oil and the Middle East stock markets, in particular on the Tehran Stock Exchange, and to analyze this variance using different time horizons. The results show that in all time horizons the variance of forecast error in most markets is due to the shocks themselves. The Saudi Arabian Stock Exchange has the most impact on other Middle Eastern stocks. The dynamics connectedness of the oil markets is remarkable, however, as the time horizon increases, dynamic connectedness between the two markets decreases and they are mostly affected by other markets, especially the Middle East stock exchanges except for Iran. Moreover, Iran stock market is an isolated market. About the gold market, there is a significant connectedness with the pound-dollar exchange rate and gold market; however, the dynamics connectedness of this market with other markets are not significant. Therefore, this market and Iran stock exchange can be used as a tool to hedge risk for investors.

Highlights

The expansion of globalization has made the financial markets of different countries more influential than ever before
The purpose of this article is to investigate that how do markets connected to each other in different time horizons? this study aimed to present networks in different time horizons to investigate the dynamic connectedness of oil, gold, foreign exchange and stock markets using the variance decomposition method introduced by Diebold & Yilmaz [4] in 2014
In terms of the long-term relationships of markets, we find that most of the variance of forecast error is due to the shocks of those markets, this number declines compared to other time horizons

Summary

Introduction

The expansion of globalization has made the financial markets of different countries more influential than ever before. Many studies have cited oil price fluctuations as the external factor causing shocks in the economies of countries, including Hamilton [1], Kilian [2], and Bagheri and Ebrahimi [3]. Oil price shocks affect macroeconomic variables such as stock market, inflation, growth rate, business cycle and dollar equity. Given the significant fluctuations in oil prices in recent years and the important role oil plays in the economies of many countries, many researchers and policy makers are looking for evidence that these fluctuations are affecting other financial markets. This study aimed to present networks in different time horizons to investigate the dynamic connectedness of oil, gold, foreign exchange and stock markets using the variance decomposition method introduced by Diebold & Yilmaz [4] in 2014.

Objectives

Methods

Results

Conclusion