Journal of Applied Finance & Banking

Volatility Transmission and Conditional Correlation between Oil prices, Stock Market and Sector Indexes: Empirics for Saudi Stock Market

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  • Abstract

    This paper investigates the volatility transmission effect and conditional correlations among crude oil, stock market and sector stock indexes in Saudi Arabia. Using daily data from January 3, 2009 to March 21, 2012 and VAR-BEKK specification, we find significant volatility transmission between oil prices and Saudi stock market. Furthermore, our findings show that sector stock returns significantly react to oil prices changes. In addition, except telecom sector, the results show the presence of volatility transmission between stock market and sector stock market returns. Our results are important for understanding how oil prices changes affect Saudi stock market. Indeed, our findings offer insights to investors to know how the value of their portfolios may be affected by large variations observed in oil prices. Our results may have crucial implications for market participants whose optimal portfolio decisions and the risk management policy depend on the characteristics and behavior of conditional volatility.