Relationships among U.S. oil prices and oil industry equity indices

Abstract

The cointegration analysis suggests that the pure oil industry equity system and the mixed oil price/equity index system offers more opportunities for long-run portfolio diversification and less market integration than the pure oil price systems. On a daily basis, in the oil price systems all oil prices with the exception of the 3-month futures can explain the future movements of each other. In the mixed system, none of the daily oil industry stock indices can explain the daily future movements of the New York Mercantile Exchange (NYMEX) futures prices, whereas these prices can explain the movements of independent companies engaged in exploration, refining, and marketing. The spillover analysis of oil volatility transmission suggests that the oil futures market has a matching or echoing volatility effect on the stocks of some oil sectors and a volatility-dampening effect on the stocks of others. The policy implication is that, during times of high oil volatility, traders should choose the S&P oil sector stocks that match their tolerance for volatility and use the right financial derivative to hedge against or profit from this volatility. The day effect for volatility transmission suggests that Friday has a calming effect on the volatility of oil stocks in general. The effect for Monday is not significant.