Risk spillovers between the S&P500, green bonds, real estate, oil market, and dollar index June 2022

Jamshidi, Hamid; Ghanbari, Alimohammad

doi:10.61186/ijf.2024.410278.1425

Risk spillovers between the S&P500, green bonds, real estate, oil market, and dollar index June 2022

Document Type : Original Article

Authors

Hamid Jamshidi ¹

Alimohammad Ghanbari ²

¹ MSc, Department of Finance, Petroleum Faculty of Tehran, Petroleum University of Technology, Iran.

² Assistant Prof., Department of Finance, Petroleum Faculty of Tehran, Petroleum University of Technology, Iran.

10.61186/ijf.2024.410278.1425

Abstract

One of the main concepts in finance is portfolio diversification and optimization. Typically, investors use the risk and return approach to diversify their portfolios. However, risk spillovers and market connectivity should also be considered when making investment decisions, especially during times of crisis. The TVP-VAR approach is used in this study to analyze risk spillovers and connectivity between the S&P 500 index, green bond, real estate, oil market, and dollar index in the USA from 2016 to July 2022. The TVP-VAR model is a time-varying model that may consider current political and economic circumstances. As a result, investors can choose wisely when it comes to their portfolios. According to comparisons with other markets, the S&P 500 index and the real estate market are the two most significant sources of volatility in the system. In fact, they not only transmit greater volatility, but they also take it in more. After 2020, there will likely be a significant increase in the volatility of the real estate market and the S&P 500 index due to the COVID-19 epidemic. Additionally, as anticipated, other markets have an impact on the green bond market. It does not, however, transmit them.

Keywords

Risk Spillovers

S&P500 Index

Green Bond

Real Estate

Oil

Dollar Index

Adekoya, O. B., & Oliyide, J. A. (2021). How COVID-19 drives Connectedness among commodity and financial markets: Evidence from TVP-VAR and causality-in-quantiles techniques. Resources Policy, 70, 101898.

Apergis, N., & Miller, S. M. (2009). Do structural oil market shocks affect stock prices? Energy economics, 31(4), 569-575.

Asadi, M., Roubaud, D., & Tiwari, A. K. (2022). Volatility spillovers amid crude oil, natural gas, coal, stock, and currency markets in the US and China based on time and frequency domain connectedness. Energy Economics, 109, 105961.

Balcilar, M., Ozdemir, Z. A., & Ozdemir, H. (2021). Dynamic return and volatility spillovers among S&P 500, crude oil, and gold. International Journal of Finance & Economics, 26(1), 153-170.

Bouri, E., Cepni, O., Gabauer, D., & Gupta, R. (2021). Return Connectedness across asset classes around the COVID-19 outbreak. International review of financial analysis, p. 73, 101646.

Cappiello, L., Engle, R. F., & Sheppard, K. (2006). Asymmetric dynamics in the correlations of global equity and bond returns. Journal of Financial econometrics, 4(4), 537–572.

Christiansen, C. (2010). Decomposing European bond and equity volatility. International Journal of Finance & Economics, 15(2), 105-122.

Chuliá, H., & Torro, H. (2008). The economic value of volatility transmission between the stock and bond markets. Journal of Futures Markets: Futures, Options, and Other Derivative Products, 28(11), 1066-1094.

Cunado, J., & De Gracia, F. P. (2005). Oil prices, economic activity, and inflation: evidence for some Asian countries. The Quarterly Review of Economics and Finance, 45(1), 65-83.

Cunado, J., Jo, S., & de Gracia, F. P. (2015). Macroeconomic impacts of oil price shocks in Asian economies. Energy Policy, 86, 867-879.

Dean, W. G., Faff, R. W., & Loudon, G. F. (2010). Asymmetry in return and volatility spillover between equity and bond markets in Australia. Pacific-Basin Finance Journal, 18(3), 272-289.

Diebold, F. X., & Yilmaz, K. (2012). Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 28(1), 57-66.

Elsayed, A. H., Naifar, N., Nasreen, S., & Tiwari, A. K. (2022). Dependence structure and dynamic connectedness between green bonds and financial markets: Fresh insights from time-frequency analysis before and during COVID-19 pandemic. Energy Economics, 107, 105842.

Fleming, J., Kirby, C., & Ostdiek, B. (1998). Information and volatility linkages in the stock, bond, and money markets. Journal of financial economics, 49(1), 111–137.

Gabauer, D., & Gupta, R. (2020). Spillovers across macroeconomic, financial and real estate uncertainties: a time-varying approach. Structural Change and Economic Dynamics, pp. 52, 167–173.

Guo H, Zhao X, Yu H, Zhang X. Analysis of global stock markets' connections with emphasis on the impact of COVID-19. Physica A. 2021.

Huang, R. D., Masulis, R. W., & Stoll, H. R. (1996). Energy shocks and financial markets. Journal of Futures Markets, 16(1), 1-27.

Jones, C. M., & Kaul, G. (1996). Oil and the stock markets. The Journal of Finance, 51(2), 463-491.

Khalfaoui, R., Sarwar, S., & Tiwari, A. K. (2019). Analysing volatility spillover between the oil market and the stock market in oil-importing and oil-exporting countries: Implications on portfolio management. Resources Policy, pp. 62, 22–32.

Kim, J., Park, Y. J., & Ryu, D. (2017). Stochastic volatility of the futures prices of emission allowances: A Bayesian approach. Physica A: Statistical Mechanics and its Applications, 465, 714-724.

Leung, G. C. (2010). China's oil use, 1990–2008. Energy policy, 38(2), 932–944.

Lizardo, R. A., & Mollick, A. V. (2010). Oil price fluctuations and US dollar exchange rates. Energy Economics, 32(2), 399–408.

Maitra, D., & Dawar, V. (2019). Return and Volatility Spillover among Commodity Futures, Stock Market and Exchange Rate: Evidence from India. Global Business Review, 20(1), 214-237.

Naeem, M. A., Conlon, T., & Cotter, J. (2022). Green bonds and other assets: Evidence from extreme risk transmission. Journal of Environmental Management, p. 305, 114358.

Narayan, P. K., & Narayan, S. (2007). Modelling oil price volatility. Energy policy, 35(12), 6549-6553.

Naresh, G., Vasudevan, G., Mahalakshmi, S., & Thiyagarajan, S. (2018). Spillover effect of US dollar on the stock indices of BRICS. Research in International Business and Finance, 44, 359-368.

Nazlioglu, S., Gormus, N. A., & Soytas, U. (2016). Oil prices and real estate investment trusts (REITs): Gradual-shift causality and volatility transmission analysis. Energy Economics, 60, 168-175.

Park, D., Park, J., & Ryu, D. (2020). Volatility spillovers between equity and green bond markets. Sustainability, 12(9), 3722.

Park, J., & Ratti, R. A. (2008). Oil price shocks and stock markets in the US and 13 European countries. Energy economics, 30(5), 2587-2608.

Pham, L., & Nguyen, C. P. (2022). How do stock, oil, and economic policy uncertainty influence the green bond market? Finance Research Letters, 45, 102128.

Rao, A., Gupta, M., Sharma, G. D., Mahendru, M., & Agrawal, A. (2022). Revisiting the financial market interdependence during COVID-19 times: a study of green bonds, cryptocurrency, commodities and other financial markets. International Journal of Managerial Finance, (ahead-of-print).

Reboredo, J. C., & Ugolini, A. (2020). Price connectedness between green bond and financial markets. Economic Modelling, 88, 25-38.

Sadorsky, P. (1999). Oil price shocks and stock market activity. Energy economics, 21(5), 449–469.

Samitas, A., Papathanasiou, S., Koutsokostas, D., & Kampouris, E. (2022). Volatility spillovers between fine wine and major global markets during COVID-19: A portfolio hedging strategy for investors. International Review of Economics & Finance, pp. 78, 629–642.

Sarwar, S., Tiwari, A. K., & Tingqiu, C. (2020). Analyzing volatility spillovers between oil market and Asian stock markets. Resources Policy, 66, 101608.

Shahzad, S. J. H., Mensi, W., Hammoudeh, S., Rehman, M. U., & Al-Yahyaee, K. H. (2018). Extreme dependence and risk spillovers between oil and Islamic stock markets. Emerging Markets Review, 34, 42-63.

Steeley, J. M. (2006). Volatility transmission between stock and bond markets. Journal of International Financial Markets, Institutions and Money, 16(1), 71–86.

Tiwari, A. K., André, C., & Gupta, R. (2020). Spillovers between US real estate and financial assets in time and frequency domains. Journal of Property Investment & Finance, 38(6), 525–537.

Uddin, G. S., Tiwari, A. K., Arouri, M., & Teulon, F. (2013). On the relationship between oil price and exchange rates: A wavelet analysis. Economic Modelling, pp. 35, 502–507.

Wen, D., Wang, G. J., Ma, C., & Wang, Y. (2019). Risk spillovers between oil and stock markets: A VAR for VaR analysis. Energy Economics, 80, 524-535.

Wen, F., Zhang, M., Deng, M., Zhao, Y., & Ouyang, J. (2019). Exploring the dynamic effects of financial factors on oil prices based on a TVP-VAR model. Physica A: Statistical Mechanics and its Applications, p. 532, 121881.

Xiao, J., Hu, C., Ouyang, G., & Wen, F. (2019). Impacts of oil implied volatility shocks on stock implied volatility in China: Empirical evidence from a quantile regression approach. Energy Economics, 80, 297-309.

Xu, W., Ma, F., Chen, W., & Zhang, B. (2019). Asymmetric volatility spillovers between oil and stock markets: Evidence from China and the United States. Energy Economics, 80, 310-320.

Zhang, H., Chen, J., & Shao, L. (2021). Dynamic spillovers between energy and stock markets and their implications in the context of COVID-19. International Review of Financial Analysis, p. 77, 101828.

Zhang, Y. J., Fan, Y., Tsai, H. T., & Wei, Y. M. (2008). The spillover effect of US dollar exchange rate on oil prices. Journal of Policy Modeling, 30(6), 973–991.