Volatility spillover from crude oil and gold to BRICS equity markets

The purpose of this paper is to investigate the volatility spillover from crude oil and gold to the BRICS stock markets, after removing the effect of co-movement of prices of crude oil and gold.

Three multivariate GARCH models (dynamic conditional correlation, constant conditional correlation, and Baba, Engle, Kraft and Kroner) are used to capture the dynamic relationship between the crude oil and gold returns. The innovations from gold and oil are orthogonalized, and the EGARCH model is employed for the spillover analysis. The influences of oil price shocks and gold price shocks are tested on the returns of each of the BRICS equity markets.

There is evidence of volatility spillover from both the crude oil and gold to the BRICS stock markets. A sub-sample analysis suggests that the volatility spillover from gold was not significant before the financial crisis of 2008, but became significant post-crisis. The volatility asymmetry, which was not significant before the crisis, also became significant after it.

This study examines the volatility spillover to the BRICS stock markets from crude oil and gold, after accounting for the co-movement in their prices. It can help equity investors to judge whether gold can provide incremental diversification benefit, if used in conjunction with crude oil. The study also provides insights into the changes caused by the 2008 financial crisis on this volatility spillover mechanism.