Oil Price and Equity Markets: Modeling Co-Movement and Conditional Value at Risk

Master's thesis in FinanceThis paper studies the co-movement between oil prices and stock markets during the period 2006 – 2017 utilizing quantile regression. The studied stock indices are AEX, BOVESPA, CAC40, DAX30, EUROSTOXX50, FTSE100, SMI, S&P500 and TSX60, and the United States Oil Fund ETF represents the oil price. We investigate the co-movement and find a positive and significant co-movement between oil returns and stock market returns across quantiles for the stock market return distribution in all indices examined. The estimated coefficients from the quantile regression exhibit a U-shape, meaning that the dependence between oil returns and stock returns is strongest for high and low quantiles of the stock market distribution. However, we show that this U-shaped pattern disappears after we include implied volatility as an additional explanatory variable. Next, we find that the co-movement between oil and equity is asymmetric for most indices, with higher dependence in the lowermost quantiles. Finally, we find that the contribution of oil prices to value at risk of stock indices vary over time and is asymmetric, meaning that oil price risk contribute differently to the long position in the stock market than to the short position.submittedVersio