Title: Do oil prices predict the dynamics of equity market? Fresh evidence from DCC, ADCC and Go-GARCH models

Authors: Fatma Khalifa; Abderrazak Dhaoui; Mohamed Sahbi Nakhli; Saad Bourouis; Saloua Benammou

Addresses: Department of Quantitative Methods and Econometrics, Faculty of Economic Sciences and Management, University of Sousse, Sousse, Tunisia ' IHEC, LaREMFiQ, University of Sousse, Sousse, Tunisia; Ipag Business School (IPAG Lab), Paris, France ' ISIG Kairouan, University of Kairouan, Kairouan, Tunisia; IHEC, LaREMFiQ, University of Sousse, Sousse, Tunisia ' Institute of High Business Studies, University of Sousse, Sousse, Tunisia ' Department of Quantitative Methods, Faculty of Economic Sciences and Management, University of Sousse, City Erriadh Sousse, Tunisia

Abstract: This paper investigates the dynamic condition correlations between oil price, industrial production, short-term interest rates and equity market in South Korea using three types of GARCH models. The results from the DCC and ADCC GARCH models show strong evidence of significant dynamic conditional correlations suggesting higher long-term persistence of volatility than short-term persistence. The findings suggest, particularly, that oil prices have positive dynamic conditional correlations to equity markets, while the dynamic conditional correlations between equity market and short-term interest rates are significantly negative. These results have considerable economic implications. Firstly, oil price as a risk factor increases the equity market volatility. It also represents an implicit risk factor that cannot be diversified and which requires therefore to be hedged or priced. Secondly, the oil acts as an inflationary factor leading central banks to adjust their short-term interest rates in order to smooth the inflationary effect on both real economy and financial activity.

Keywords: oil price; equity market; industrial production; short-term interest rates; dynamic conditional correlations.

DOI: 10.1504/IJGEI.2023.127640

International Journal of Global Energy Issues, 2023 Vol.45 No.1, pp.66 - 85

Accepted: 20 Jan 2022
Published online: 13 Dec 2022 *