Realized volatility transmission between crude oil and equity futures markets: A multivariate HAR approach

Abstract

This paper differs from extant literature because it studies volatility co-movements with a multivariate orthogonalized HAR model, a flexible specification for the time series of realized volatility, which is able to identify short-, mid- and long-term spillover effects. We examine volatility transmission mechanisms using high-frequency data of the stock index futures on S&P 500, Nikkei 225, FTSE 100 and the futures on the West Texas Intermediate crude oil during the period from September 2002 to September 2012. Considering the full sample, the short-term volatility of the equity futures contains information about future oil volatility incremental to the information inherent in the time series of oil volatility. On the other hand, weekly and monthly volatilities do not exhibit a significant spillover effect. Breaking the whole sample into three subsamples, no significant Granger causalities are observed in the pre-crisis period while in the crisis time and its aftermath, we document that the US and UK equity market volatilities to Granger cause the oil futures volatility which itself leads the Japanese market. In terms of magnitude, we observe an increase in the short-term volatility spillover over time. Studying the residuals of the HAR transmission models within a CCC/DCC-GARCH framework reveals increasing instantaneous correlation between the energy and equity volatilities in the course of time.