Oil Price Fluctuations Impact on International Oil Companies’ Stocks: Traders’ Hedging Options Explored via VAR and GARCH Spillover Analysis

Abstract

This thesis investigates the static and temporal dynamics of return and volatility spillover between oil markets and the stock prices of the two largest corporations, as measured by market capitalization in various oil-heavy economies around the world. The research also broadens to include additional markets such as major stock indices, EU carbon permits, EUR/USD exchange rates, and interest rates. This study covers the period of 2009-2023, utilizing daily closing prices. To investigate this, we use the \cite{diebold2009measuring, diebold2012better, diebold2014network} spillover index framework, incorporating a Vector Autoregressive (VAR) model and an Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model. Finally, we employ the minimum variance hedge ratio methodology to explore options for investors to reduce risk when investing in the oil market.

Our findings suggest the following: Major North American and European stock indices and oil companies serve as key sources and drivers of spillover effects, influencing global financial dynamics. Asian markets exhibit more localized spillover effects, primarily within the region. Oil prices function mainly as a net receiver of spillover effects and do not appear to influence the long-term performance of oil and gas companies. However, during crises, oil prices become a short-term net transmitter of spillover effects. Regarding hedging, we utilize Crude Oil futures as a hedging instrument with specific variables, examining periods before, during, and after the COVID-19 pandemic. Our findings reveal increased volatility and lower average hedge ratios during the crisis, highlighting diverse hedging needs across variables.