Oil prices, stock market returns and volatility spillovers: Evidence from Turkey

Abstract

This paper examines the relationship between crude oil prices and stock market returns in Turkey taking into account volatility spillovers that are exemplified by second moment effects. Using weekly data from 1990 to 2017 and time varying causality-in-mean and causality-in-variance tests and taking into account structural breaks, we model each series as an EGARCH process in order to capture any leverage effects in the volatility of returns. Empirical results suggest crude oil prices as measured by Brent benchmark have significant effects on stock market returns in Turkey. While we fail to document significant spillover effects stemming from oil prices in the entire sample, there are significant spillover effects from crude oil price changes to stock market returns in 1993 and 2008–09. These results suggest that government policies must take into account risk spillover effects between markets and that investors are better off monitoring crude oil markets in portfolio allocation decisions. © 2020 The Society for Policy Modeling