Investigating the risk spillover from crude oil market to BRICS stock markets based on Copula-POT-CoVaR models

Ke Liu; Changqing Luo; Zhao Li; Ke Liu; Changqing Luo; Zhao Li

doi:10.3934/QFE.2019.4.754

Quantitative Finance and Economics

2019, Volume 3, Issue 4: 754-771. doi: 10.3934/QFE.2019.4.754

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Research article

Investigating the risk spillover from crude oil market to BRICS stock markets based on Copula-POT-CoVaR models

1.
School of Mathematics and Statistics, Central China Normal University, Wuhan, 430079, China
2.
Finance School, Hunan University of Technology and Business, Changsha, Hunan Province, 410205, China

Received: 09 December 2019 Accepted: 22 December 2019 Published: 25 December 2019
JEL Codes: G15

To investigate the risk spillover effect from crude oil market to BRICS stock markets, we extend the Copula-CoVaR models by introducing the Peak-over-Threshold and construct the Copula-POT-CoVaR model. By using the crude oil market and BRICS stock market data from 2006 to 2016 as the sample, the empirical study results show that: (a) Copula-POT-CoVaR model is an effective method to measure the extreme risk, (b) there is a significant risk spillover from crude oil market to BRICS stock markets, and the risk of crude oil market explains more than 50 percent of BRICS stock markets' risk, and (c) within five BRICS stock markets, Russia's stock market and China's stock market receive the strongest and slightest spillover from crude oil market respectivlely. These findings indicate that close attention should be paid to the crude oil market when managing the investment portfolio of BRICS markets, especially in the face of high volatility of crude oil market.
- spillover effect,
- crude oil market,
- BRICS stock markets,
- Copula-POT-CoVaR
Citation: Ke Liu, Changqing Luo, Zhao Li. Investigating the risk spillover from crude oil market to BRICS stock markets based on Copula-POT-CoVaR models[J]. Quantitative Finance and Economics, 2019, 3(4): 754-771. doi: 10.3934/QFE.2019.4.754

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Abstract

To investigate the risk spillover effect from crude oil market to BRICS stock markets, we extend the Copula-CoVaR models by introducing the Peak-over-Threshold and construct the Copula-POT-CoVaR model. By using the crude oil market and BRICS stock market data from 2006 to 2016 as the sample, the empirical study results show that: (a) Copula-POT-CoVaR model is an effective method to measure the extreme risk, (b) there is a significant risk spillover from crude oil market to BRICS stock markets, and the risk of crude oil market explains more than 50 percent of BRICS stock markets' risk, and (c) within five BRICS stock markets, Russia's stock market and China's stock market receive the strongest and slightest spillover from crude oil market respectivlely. These findings indicate that close attention should be paid to the crude oil market when managing the investment portfolio of BRICS markets, especially in the face of high volatility of crude oil market.

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