Our Papers
A dynamic regime switching GARCH-CAPM for energy and financial markets
C. Urom, J. Chevallier, B. Zhu
Abstract:
This paper develops a methodology for estimating a time-varying conditional version of the CAPM with regime changes in conditional variance dynamics. Our research goal is related to documenting the power of the beta when it is estimated dynamically. The empirical performance is tested across a sample of 81 financial, energy, and other commodity markets for the period August 1999–January 2018. The conditional regime-switching GARCH CAPM, with time-varying betas explaining both bull and bear markets, outperforms the unconditional (static) CAPM. Among stocks, there are significant time variations in betas across our models and regimes. This empirical feature is even more pronounced in the USA, the UK, Germany, France, China, and Malaysia. Among energy and other commodities, we find similar variations in the market price of risk. The direction of the relation with market returns for Crude Oil, Gold, Copper, Tin, Rubber, Aluminum, and Platinum is the same across our nested models. This result also holds for aggregate markets indices. Secondly, we provide a ranking by mean filtered volatility series where Natural Gas stands out at a high level. Average pricing errors are inferior in the case of the conditional model, and for Crude Oil. Lastly, we demonstrate that the regime-switching model delivers better estimates of one-day-ahead Value-at-Risk than its non-switching counterpart. Our results shed light on the supremacy of the market factor alone associated with time variation in risk premia across the energy and financial markets.
A dynamic regime switching GARCH-CAPM for energy and financial markets. In Energy Economics , 85, 104577, 2020
C. UROM, K. Onwuka, K. Uma, D. Yuni
Abstract:
This paper has two aims. First, we measure the asymmetric effect of crude oil prices on stock returns under a regime switching framework in the context of major oil exporting countries namely: the United Arab Emirates (UAE), Qatar, Saudi Arabia, Russia, Venezuela and Kuwait. The key results from our baseline model suggest that stock returns in all the markets exhibit regime switching behaviour with the bull market regime dominating most of the period except for Russia. Also, we found strong linkages among the bear market periods with Qatar and Saudi Arabia exhibiting the strongest negative linkage. The UAE and Saudi Arabia are more likely to experience bearish market conditions at same period whereas Russia is segmented from other markets except Saudi Arabia. Results from our augmented model suggest that the effect of crude oil price varies across regimes, impacting more strongly on stock returns during recession than during periods of expansion especially in Venezuela and Saudi Arabia. Secondly, we examine volatility spillover from crude oil prices to stock returns and found a substantial cyclical volatility spillover from crude oil to returns especially in the UAE, Russia and Qatar and that the evolution of spillover follows key developments in the market for crude oil, geopolitical risks and then, global economic conditions. Our results hold profound implications for risk management and portfolio diversification strategy in oil exporting region.
Regime dependent effects and cyclical volatility spillover between crude oil price movements and stock returns. In International Economics , 161, 10-29, 2020.
R. Boroumand, T. Porcher, C. Urom
Abstract:
This article analyzes the transmission mechanisms between oil prices and fuel prices in France over the period 2005−2020. The econometric procedure focuses on three singular years marked by significant negative oil prices shocks: 2008 (the global financial crisis), 2014 (the sharp drop in prices due to the boom of US shale oil), 2020 (Covid-19 economic downturn). To analyze the linkages between oil and fuel prices, we use the ARDL bounds testing approach of cointegration with weekly data between January 7, 2005 and October 30, 2020. We find that over the entire period, fuel distributors report increases in oil prices more than decreases. We find that this asymmetry is highest in 2008. Our paper provides some policy recommendations based on our findings.
Negative oil price shocks transmission: the comparative effects of the GFC, shale oil boom, and Covid-19 downturn on French gasoline prices, In Research in International Business and Finance, 58, 101455, 2021.
C. Urom, G. Ndubuisi, J. Ozor
Abstract:
This paper examines the dynamic short- and long-run asymmetric interactions and causality between real economic activity and stock and gold markets volatility shocks using both the cointegration Nonlinear Autoregressive Distributed Lag and Granger causality tests. In a further analysis, we used both the original and the partial sums decomposition of these variables to examine the level of market integration under different market conditions using the spillover index of Diebold and Yilmaz (2009; 2012; 2014). Our results indicate asymmetries in the short- and long-term relationships among these variables. In the long run, both positive and negative shocks from the energy market increase stock market volatility. However, only positive shocks on the gold market increase stock market volatility, while positive (negative) shocks on economic activity reduce (increase) stock market volatility. Also, an increase in both stock and energy markets volatility shocks are detrimental to real economic activity. We find a feedback effect between real economic activity shocks and these market volatility indexes, except for the gold market which has a unidirectional causality with the real economic activity shocks. Finally, the spillover analysis suggests a stronger integration among the partial sums, with the energy market as the dominant net-transmitter of both positive and negative shocks while the gold market is a net-receiver of shocks. Our results hold crucial implications for both investors and policymakers.
Economic activity and financial and commodity markets’ shocks: an analysis of implied volatility indexes. In International Economics 2021, 165, 51-66
Commodities risk premia and regional integration in gas-exporting countries
J. Chevallier, C. Urom, I. Abid, S. Goutte, K.Guesmi
Abstract:
This study examines the fundamental driving forces of stock market integration with particular emphasis on major Gas-Exporting Countries (hereafter known as GECs), namely the United Arab Emirates, Qatar, Venezuela, Saudi Arabia, Russia, and Kuwait, over the period from June 2003 to November 2017. The novelty of our study stems from the fact that we examine a dynamic process of international, regional and national stock markets integration using a set of local, regional, global and commodities as driving forces of integration. Particularly, we measure market integration using gas price as a common source of risk in addition to the world, regional and domestic sources of risk based on a conditional version of the International Capital Asset Pricing Model (ICAPM). Our study also differs from past ones in that we investigate the integration of stock markets into the international market as well as in the GECs countries. Our results show that the level of market integration of the major gas-exporting countries varies widely over time and depends on the interest rate spread, the level of market openness and market volatility. It also seems to be still significantly segmented from both the global and GECs markets. Gas risk represents a small part of the global risk in all the countries considered in this study.
Commodities risk premia and regional integration in gas-exporting countries, Energy Economics, vol. 80 pp. 267–276, 2019.
Financial Development and Energy Consumption: Is the MENA Region Different
B. Gais, I. Abid, O. Kaabia, R. Ayadi, K.Guesmi
Abstract:
This paper examines the relationship between financial development and energy consumption estimations in the major MENA countries (Algeria, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates and Yemen) over the period 1996 to 2014. We consider the energy use in kg of oil equivalent per capita as a dependent variable that reflects the cross-country energy consumption. We measure the level of financial development in the MENA countries by considering banking indicators. Extending the model of Sadorsky (2011), we estimate both linear and non-linear dynamic panel model. We use new robust econometrics to take into account heterogeneity and nonlinearity and we control the estimation results for the period of the global financial crisis. The results of the study report a positive and statistically significant relationship between the intermediation capacity of the banking system as well as its size and energy consumption. The findings also confirm a non-linear and inverted U-shaped relationship between financial development and energy demand for the MENA region. This implies that initially energy demand increases with financial development and then, at a turning point of financial development, it declines. The policy implications of these results are discussed.
Financial Development and Energy Consumption: Is the MENA Region Different, Energy Policy, 135, 111000, 2019.