The 2020 Oil Price War Has Increased Integration Between G7 Stock Markets and Crude Oil WTI

Rui Dias – Escola Superior de Ciências Empresarias at Instituto Politécnico de Setúbal, Portugal and CEFAGE-UE, IIFA, University of Évora, Portugal

Paulo Alexandre – Escola Superior de Ciências Empresarias at Instituto Politécnico de Setúbal, Portugal

Paula Heliodoro – Escola Superior de Ciências Empresarias at Instituto Politécnico de Setúbal, Portugal

Hortense Santos – Escola Superior de Ciências Empresarias at Instituto Politécnico de Setúbal, Portugal

Ana Rita Farinha – Escola Superior de Ciências Empresarias at Instituto Politécnico de Setúbal, Portugal

Márcia C. Santos – Escola Superior de Ciências Empresarias at Instituto Politécnico de Setúbal, Portugal and Information Sciences and Technologies and Architecture Research Center (ISTAR-IUL) at Instituto Universitário de Lisboa (ISCTE-IUL), Portugal

7th International Scientific ERAZ Conference – ERAZ 2021 – Selected Papers: KNOWLEDGE BASED SUSTAINABLE DEVELOPMENT,  Online/virtual, May 27, 2021

ERAZ Conference Selected Papers are published by: Association of Economists and Managers of the Balkans – Belgrade, Serbia

ERAZ conference partners: Faculty of Economics and Business, Mediterranean University, Montenegro; University of National and World Economy – Sofia, Bulgaria; Faculty of Commercial and Business Studies – Celje, Slovenia; AMBIS University, Prague – Czech Republic; Faculty of Applied Management, Economics and Finance – Belgrade, Serbia

ERAZ Conference 2021 Selected Papers ISBN 978-86-80194-47-9, ISSN 2683-5568, DOI: https://doi.org/10.31410/ERAZ.S.P.2021

Abstract: This paper aims to examine whether the oil price war between Saudi Arabia and Russia has increased integration between the Crude Oil WTI Spot oil index and the G7 stock markets, namely France (CAC 40), Germany (DAX 30), USA (DOW JONES), UK (FTSE 100), Italy (FTSE MID), Japan (Nikkei 225), Canada
(S&P TSX), from January 2018 to January 2021. The results show that in the period before the oil price war, the G7 stock markets and the WTI index had 29 integrations (out of 56 possible). The WTI index is integrated with the UK stock markets (FTSE 100), and Japan (NIKKEI 225), and is integrated into the Japanese market. In the period of the oil price war, the G7’s stock markets and the Crude Oil WTI Spot index had 43 integrations (out of 56 possible), namely the WTI, Dow Jones, and Nikkei 225 indexes, with all their peers (7 out of 7 possible). When comparing the period before and during the 2020 oil crash, we found that integrations increased significantly from 29 to 43 (out of 56 possible); we also found that the Crude Oil WTI Spot index is no longer a safe haven for portfolio diversification in G7 stock markets. These findings validate our research
issue, i.e., the oil price war between Saudi Arabia and Russia had increased integrations, and this evidence could question portfolio diversification.

ERAZ Conference

Creative Commons Non Commercial CC BY-NC: This article is distributed under the terms of the Creative Commons Attribution-Non-Commercial 4.0 License (https://creativecommons.org/licenses/by-nc/4.0/) which permits non-commercial use, reproduction and distribution of the work without further permission. 

References

Ajami, R. (2020). Globalization, the Challenge of COVID-19 and Oil Price Uncertainty. Journal of Asia-Pacific Business. https://doi.org/10.1080/10599231.2020.1745046

Alexandre, P., Dias, R., & Heliodoro, P. (2020a). EUROPEAN FINANCIAL MARKET INTE­GRATION: A CLOSER LOOK AT GOVERNMENT BONDS IN EUROZONE COUN­TRIES. Balkans Journal of Emerging Trends in Social Sciences, 3(1), 78–86. https://doi. org/10.31410/balkans.jetss.2020.3.1.78-86

Alexandre, P., Dias, R., & Heliodoro, P. (2020b). HOW LONG IS THE MEMORY OF THE RE­GION LAC STOCK MARKET? Balkans Journal of Emerging Trends in Social Sciences, 3(2). https://doi.org/10.31410/balkans.jetss.2020.3.2.131-137

Alexandre, P., Heliodoro, P., & Dias, R. (2019). THE CONTAGION EFFECT IN EUROPE: A DCC GARH APPROACH. In 5th LIMEN Conference Proceedings (part of LIMEN con­ference collection) (pp. 73–79). https://doi.org/10.31410/limen.2019.73

Babecký, J., Komarek, L., & Komárková, Z. (2017). Financial integration at times of crisis and re­covery. International Finance Review. https://doi.org/10.1108/S1569-376720170000018010

Bhatia, V., Das, D., & Kumar, S.B. (2020). Hedging effectiveness of precious metals across frequencies: Evidence from Wavelet based on Dynamic Conditional Correlation analy­sis. Physica A: Statistical Mechanics and Its Applications. https://doi.org/10.1016/j.phy­sa.2019.123631

Clemente, J., Montañés, A., & Reyes, M. (1998). Testing for a unit root in variables with a dou­ble change in the mean. Economics Letters, 59(2), 175–182. https://doi.org/10.1016/S0165- 1765(98)00052-4

Dias, R., Teixeira, N., Machova, V., Pardal, P., Horak, J., & Vochozka, M. (2020). Random walks and market efficiency tests: Evidence on US, Chinese and European capital markets within the context of the global Covid-19 pandemic. Copernicus economy, 11(4). https:// doi.org/10.24136/OC.2020.024

Dias, Rui, & Carvalho, L.C. (2020). Hedges and safe havens: An examination of stocks, gold and silver in Latin America’s stock market. UFSM Administration Journal, 13(5), 1114– 1132. https://doi.org/10.5902/1983465961307

Dias, Rui, da Silva, J. V., & Dionísio, A. (2019). Financial markets of the LAC region: Does the crisis influence the financial integration? International Review of Financial Analysis, 63 (January), 160–173. https://doi.org/10.1016/j.irfa.2019.02.008

Dias, Rui, Heliodoro, P., & Alexandre, P. (2019). Risk transmission among stock markets in LAC Region: financial crises impact, 91–97.

Dias, Rui, Heliodoro, P., & Alexandre, P. (2020). Efficiency of Asean-5 Markets: An Detrended Fluctuation Analysis. Mednarodno Inovativno Poslovanje = Journal of Innovative Busi­ness and Management, 12(2), 13–19. https://doi.org/10.32015/jibm.2020.12.2.13-19

Dias, Rui, Heliodoro, P., Alexandre, P., Santos, H., & Farinha, A. (2021). Long memory in stock returns: Evidence from the Eastern European markets. SHS Web of Conferences, 91,01029. https://doi.org/10.1051/shsconf/20219101029

Dias, Rui, Heliodoro, P., Alexandre, P., & Vasco, C. (2020). The shocks between oil market to the BRIC stock markets: A generalized VAR approach, 25–31.

Dias, Rui, Heliodoro, P., Teixeira, N., & Godinho, T. (2020). Testing the Weak Form of Effi­cient Market Hypothesis: Empirical Evidence from Equity Markets. International Jour­nal of Accounting, Finance and Risk Management, 5(1), 40. https://doi.org/10.11648/j.ija­frm.20200501.14

Dias, Rui, Pardal, P., Teixeira, N., & Machová, V. (2020). Financial Market Integration of ASE­AN-5 with China. Littera Scripta, 13(1). https://doi.org/10.36708/littera_scripta2020/1/4

Dias, Rui, & Pereira, J.M. (2021). The Impact of the COVID-19 Pandemic on Stock Markets. In­ternational Journal of Entrepreneurship and Governance in Cognitive Cities, 1(2), 57–70. https://doi.org/10.4018/ijegcc.2020070105

Gregory, A. W., & Hansen, B. E. (1996). Tests for cointegration in models with regime and trend shifts. Oxford Bulletin of Economics and Statistics, 58(2), 555–560. https://doi. org/10.1111/j.1468-0084.1996.mp58003008.x

Gulzar, S., Mujtaba Kayani, G., Xiaofeng, H., Ayub, U., & Rafique, A. (2019). Financial cointe­gration and spillover effect of global financial crisis: a study of emerging Asian financial markets. Economic Research – Ekonomska Istrazivanja. Https://doi.org/10.1080/133167 7X.2018.1550001 https://doi.org/10.1080/1331677X.2018.1550001

Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. The Econometrics Jour­nal. https://doi.org/10.1111/1368-423x.00043

Hanieh, A. (2020). COVID-19 and global oil markets. Canadian Journal of Development Stud­ies. https://doi.org/10.1080/02255189.2020.1821614

Heliodoro, P., Dias, R., Alexandre, P., & Vasco, C. (2020). Integration in BRIC ́ Sstock markets: An empirical analysis, 33–40.

Heliodoro, P., Dias, R. & Alexandre, P. (2020). VARIANCE RATIO TESTS OF THE RAN­DOM WALK IN THE LAC REGION (pp. 0–76).

Heliodoro, P., Dias, R., & Alexandre, P. (2020). Financial Contagion Between the Us and Emerg­ing Markets: Covid-19 Pandemic Case. 4th EMAN Selected Papers (Part of EMAN Con­ference Collection),1–9. https://doi.org/10.31410/eman.s.p.2020.1

Hussain Shahzad, S. J., Bouri, E., Roubaud, D., & Kristoufek, L. (2020). Safe haven, hedge and diversification for G7 stock markets: Gold versus bitcoin. Economic Modelling. https://doi. org/10.1016/j.econmod.2019.07.023

Jarque, C.M., & Bera, A. K. (1980). Efficient tests for normality, homoscedasticity and seri­al independence of regression residuals. Economics Letters, 6(3), 255–259. https://doi. org/10.1016/0165-1765(80)90024-5

Jawadi, F., Chlibi, S., & Cheffou, A. I. (2019). Computing stock price comovements with a three-regime panel smooth transition error correction model. Annals of Operations Re­search. https://doi.org/10.1007/s10479-018-2805-3

Kaufmann, R. K., & Connelly, C. (2020). Non-market forces significantly affect oil prices. Na­ture Energy. https://doi.org/10.1038/s41560-020-0563-3

Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics. https://doi.org/10.1016/S0304- 4076(01)00098-7

Moagar-Poladian, S., Clichici, D., & Stanciu, C. V. (2019). The comovement of exchange rates and stock markets in Central and Eastern Europe. Sustainability (Switzerland). https://doi. org/10.3390/su11143985

Pardal, P., Dias, R., Šuleř, P., Teixeira, N., & Krulický, T. (2020). Integration in Central Euro­pean capital markets in the context of the global COVID-19 pandemic, 15(4). https://doi. org/10.24136/eq.2020.027

Salisu, A. A., Ndako, U.B., Adediran, I. A., & Swaray, R. (2020). A fractional cointegration VAR analysis of Islamic stocks: A global perspective. North American Journal of Eco­nomics and Finance. https://doi.org/10.1016/j.najef.2019.101056

Santos, Hortense & Dias, R. (2020). The Interactions of Stock Prices and Exchange Rates in the ASEAN-5 Countries: The DCCA approach.

Tiwari, A. K., Trabelsi, N., Alqahtani, F., & Raheem, I. D. (2020). Systemic risk spillovers between crude oil and stock index returns of G7 economies: Conditional value-at-risk and marginal expected shortfall approaches. Energy Economics. https://doi.org/10.1016/j. eneco.2019.104646.

Tsay, R. S. (2005). Analysis of Financial Time Series. Technometrics (Vol. 48). https://doi. org/10.1198/tech.2006.s405

Wong, D. K. T., & Li, K. W. (2010). Comparing the performance of relative stock return differ­ential and real exchange rate in two financial crises. Applied Financial Economics. https:// doi.org/10.1080/09603100903266468