From Wells to Wallets: Tracing Volatility Spillover from Crude Oil to South Asian Stock Markets

Abstract

The association between stock and oil prices is essential because these are subjected to economic changes. The changing economic and political conditions create shocks in the economy that bring Instability in the oil market that spills over to developing nations ‘stock markets. The study has used the daily data to study the spillover from crude oil to the stock markets of South Asia. The Markov-Switching and DCC-GARCH approaches have been used in this study. The results found the positive impact of crude oil prices on the stock markets and reflect that high price volatility in the crude oil market brings positive spillover and shocks in the South Asian stock markets. Furthermore, the DCC-GARCH model found the decay in the persistence of volatility over time. Further, they explored that there does not exist volatility spillover from the crude oil to the stock markets of Nepal, Bhutan, and Sri Lanka in the short run. However, the volatility spillover in the long run exists for all the stock markets except the Colombo Stock Exchange. This shows an opportunity for the investors for portfolio diversification in Nepal, Bhutan, and Sri Lanka because these are independent of the instabilities in the crude oil market. Overall, the study provides valuable insight for policymakers and investors on spillover from oil to stock markets, risk management, and its diversification approaches in the stock markets of South Asia.