Spillovers and tail dependence between oil and US sectoral stock markets before and during COVID-19 pandemic

ABSTRACT

Purpose: This paper examines the extreme dependence and asymmetric risk spillovers between crude oil futures and ten US stock sector indices (consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, telecommunication and utilities) before and during COVID-19 outbreak. This study is based on the rationale that stock sectors exhibit heterogeneity in their response to oil prices depending on whether they are classified as oil-intensive or non-oil-intensive sectors and the possible time variation in the dependence and risk spillover effects. Design/methodology/approach: The authors employ static and dynamic symmetric and asymmetric copula models as well as Conditional Value at Risk (VaR) (CoVaR). Finally, they use robustness tests to validate their results. Findings: Before the COVID-19 pandemic, crude oil returns showed an asymmetric tail dependence with all stock sector returns, except health care and industrials (materials), where an average (symmetric tail) dependence is identified. During the COVID-19 pandemic, crude oil returns exhibit a lower tail dependency with the returns of all stock sectors, except financials and consumer discretionary. Furthermore, there is evidence of downside and upside risk asymmetric spillovers from crude oil to stock sectors and vice versa. Finally, the risk spillovers from stock sectors to crude oil are higher than those from crude oil to stock sectors, and they significantly increase during the pandemic. Originality/value There is heterogeneity in the linkages and the asymmetric bidirectional systemic risk between crude oil and US economic sectors during bearish and bullish market conditions;this study is the first to investigate the average and extreme tail dependence and asymmetric spillovers between crude oil and US stock sectors. © 2023, Emerald Publishing Limited.