Dynamic spillover and connectedness between oil futures and European bonds

Khamis Hamed Al-Yahyaee, Xuan Vinh Vo, Sang Hoon Kang

Research output: Contribution to journalArticlepeer-review

18 Citations (Scopus)

Abstract

This paper examines the spillovers and connectedness between crude oil futures and European bond markets (EBMs) having different maturities. We also analyze the hedging effectiveness of crude oil futures-bond portfolios in tranquil and turbulent periods. Using the spillovers index of Diebold and Yilmaz (2012, 2014), we show evidence of time-varying spillovers between markets under investigations, which varies between 65% and 83%. Moreover, three-month, six-month, one-year, three-year and thirty-year bonds and crude oil futures are net receivers of risk from other markets, whereas the remaining bonds are net contributors of risk to the other markets. Crude oil futures receive more risk from long-term than short-term bonds. Moreover, the magnitude of risk transmission is low for the pre-crisis and economic recovery periods. Crude oil futures market contributes significantly to the risk of other markets during the oil crisis and Brexit period. A portfolio risk analysis shows that that most investments should be in oil rather than bonds (except the short-term bonds). The hedge ratio is sensitive to market conditions, where the cost of hedging increases during GFC and ESDC period. Finally, a crude oil futures-bond portfolio offers the best hedging effectiveness during the COVID-19 pandemic period.

Original languageEnglish
Article number101342
JournalNorth American Journal of Economics and Finance
Volume56
DOIs
Publication statusPublished - 2021

Keywords

  • COVID-19
  • Crude oil futures
  • European bonds
  • Hedging effectiveness
  • Spillover

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

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