The dynamics of volatility spillovers between oil prices and stock market returns at the sector level and hedging strategies: evidence from Pakistan

Habiba, Umm E.; Zhang, Wenlong

The dynamics of volatility spillovers between oil prices and stock market returns at the sector level and hedging strategies: evidence from Pakistan

2020

Habiba, Umm E. | Zhang, Wenlong

This study investigates the transmission of volatility between OPEC-oil and sector stock returns in Pakistan. The issue of volatility spillovers across the oil and sector stocks is a crucial part of risk management and portfolio designs, as all firms are not expecting to be equally affected by changes in oil price. Empirically, we estimate a bivariate VAR-GARCH model using daily data sampled from January 1, 2003 to December 29, 2017. We also analyze the optimal weights and hedge ratios for oil-stock portfolio holdings based on our model results. Our findings reveal that negative and significant spillover effects from the oil market to agriculture, energy, and machinery sector stocks are present. However, our findings show that volatility spillover effects are insignificant from stock returns to oil. The findings of the study illustrate that development of stock market will motivate highly polluting firms to invest more in renewable and clean energy, which will help reduce carbon emissions.

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