This paper investigates the conditional correlations and volatility spillovers between crude oil
returns and stock index returns. Daily returns from 2 January 1998 to 4 November 2009 of
the crude oil spot, forward and futures prices from the WTI and Brent markets, and the
FTSE100, NYSE, Dow Jones and S&P500 index returns, are analysed using the CCC model
of Bollerslev (1990), VARMA-GARCH model of Ling and McAleer (2003), VARMAAGARCH
model of McAleer, Hoti and Chan (2008), and DCC model of Engle (2002).
Based on the CCC model, the estimates of conditional correlations for returns across markets
are very low, and some are not statistically significant, which means the conditional shocks
are correlated only in the same market and not across markets. However, the DCC estimates
of the conditional correlations are always significant. This result makes it clear that the
assumption of constant conditional correlations is not supported empirically. Surprisingly, the
empirical results from the VARMA-GARCH and VARMA-AGARCH models provide little
evidence of volatility spillovers between the crude oil and financial markets. The evidence of
asymmetric effects of negative and positive shocks of equal magnitude on the conditional
variances suggests that VARMA-AGARCH is superior to VARMA-GARCH and CCC.
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