The Transmission of Oil Price Shocks to the Stock Markets: Evidence from the US and Turkey

Oil can be considered as the most prominent and volatile commodity in financial markets all around the world economy. Oil and oil-based products are not only used directly as raw materials by many production sectors but also are used in many service sectors, also traded on stock exchange markets. Due to growing and high demand also constraints on supply, oil has become very valuable and volatile. Therefore, any fluctuation in oil prices has significant regional and worldwide effects. Many other factors including global economic developments, financial crises and political issues have profound effects on oil prices, macroeconomic variables and financial markets. Therefore, the researches have been accelareted focusing on these contributors and their influence. In the beginning of the thesis, the investigations are industrial based that focus on the magnitude of volatility transmission and the risk spillover mechanism across the oil market, financial market risks, and the oil-related Credit Default Swaps (CDS) sectors in US. The dataset covers 6 January 2004 - 2 February 2016 of seven different measurements of markets, credit risks and daily closing futures prices of West Texas Intermediate (WTI). Four of the vast risk measurements are the oil sector and oil-related sectors’ CDSs for auto, chemicals, natural gas as well as utility sectors. Furthermore, three measures of the financial market risk, the one-month expected equity volatility measured by VIX, MOVE and SMOVE are also included. These are not only used as risk measurement tools but also used to represent the volatilities in different markets and sectors. The volatility transmission mechanism across the oil and financial markets and CDS sectors is investigated using the iv volatility impulse response model that has the advantage of providing valuable information on the speed of risk transmission. In addition, the shape and sign of the volatility impulse responses also provide significant information on the transmission mechanism. The objectives are (1) to analyze the volatility transmission mechanism across the oil, oil-related CDS sectors and financial markets, using a multivariate conditional volatility model, known as Baba-Engle-Kraft-Kroner (BEKK) model and (2) to discern how major global events affect the volatility of the oil and oil-related CDS markets by employing the newly introduced Volatility Impulse Response Function (VIRF) analysis. We evaluate the risk transmission due to several recent events around the world and the results show complicated transmission mechanisms that spread over long periods. Among these events, the Lehman Brothers bankruptcy has destabilizing effects on all oil-related sectors. Findings also show that all oil market related shocks have significant risk transmission effects. For the second part of the thesis the perspective is chosen as to investigate on the general index of stock exchange market. This part analyzes the impacts of real Brent crude oil price and macroeconomic variables namely, real effective exchange rate, industrial production index and short-term real interest rate on the Turkish stock market. To this aim, a time varying parameter vector autoregression model (TVP VAR) is estimated for the time period from February 1988 to March 2017 which is monthly data. The time-varying responses and forecast error decompositions computed from this model indicates that the influence of each macroeconomic variable on the stock market return differs substantially over time. Time-varying responses imply lower influence of real crude oil price shocks compared to those of exchange rate and interest rate. Output shock has a positive influence on the stock v returns, as expected. The time-varying forecast error decomposition results suggest that stock returns have been largely explained by the variations in exchange rate and interest rate. Keywords: Risk, Sectoral CDS, VIX, MOVE, SMOVE, Volatility Impulse Response, Oil prices, Stock returns, TVP-VAR model, Turkey.