The Oil Price-Stock Market Volatility Connection: Evidence from G20 Economies

Abstract

This research investigates how oil price fluctuations affect stock market performance across G20 countries, utilizing the BEKK and DCC-GARCH models to model dynamic linkages and volatility cross-contagion between the two markets. An analysis is conducted from January 2004 to January 2021, examining the impact of oil price volatility on stock market performance and also contemplating the reverse relationship. We perform a research study in the context of the COVID-19 pandemic. The BEKK model enables us to estimate fluctuating conditional correlations over time, whereas the DCC-GARCH model offers a deeper understanding of the progressing dynamics that govern the relationships among variables. Our data analysis shows sizable reciprocal causation; the impact of oil price fluctuations on stock market performance is noticeable across the G20 economies. Volatility in the stock market is shown to be influenced by shifts in oil prices, thereby presenting their complex connection. Grasping these dynamics is crucial for both investors and policymakers in an unstable market environment and times of worldwide uncertainty. The study sheds novel insights into how monetary shock transfers happen, providing significant contributions to understanding market interdependence and the influence of commodities on market conditions.