| Article ID | Journal | Published Year | Pages | File Type |
|---|---|---|---|---|
| 964071 | Journal of International Financial Markets, Institutions and Money | 2013 | 17 Pages |
•This paper examines the time-varying relationship between returns of oil price and industrial sector indices.•This paper considers the different oil price shocks when examining the aforementioned time-varying relationship.•The correlation between industrial sectors’ returns and oil price returns is influenced by the origin of the oil price shock.•The correlation between industrial sectors’ returns and oil price returns is influenced by the type of industry.•Diversification opportunities between several industrial sectors indices and oil prices existed during the Great Recession.
The time-varying correlation between oil prices returns and European industrial sector indices returns, considering the origin of the oil price shock, is investigated. A time-varying multivariate heteroskedastic framework is employed to test the above hypothesis based on data from 10 European sectors. The contemporaneous correlations suggest that the relationship between sector indices and oil prices change over time and they are industry specific. In addition, the supply-side oil price shocks result in low to moderate positive correlation levels, the precautionary demand oil price shocks lead to almost zero correlation levels, whereas the aggregate demand oil price shocks generate significant changes in the correlation levels (either positive or negative). Both the origin of the oil price shock and the type of industry are important determinants of the correlation level between industrial sectors’ returns and oil prices. Prominent among the results is the fact that during the financial crisis of 2008 some sectors were providing diversification opportunities to investors dealing with the crude oil market.
