Volatility Transmission of Oil and Gas Sector Stocks Returns with Stock Futures and Commodity Futures

Ghulam Mustafa; Snober  Javid

doi:10.32350/aar.51.05

Ghulam Mustafa Faculty of Management Studies, University of Central Punjab, Lahore, Pakistan https://orcid.org/0009-0009-9110-2339
Snober Javid Faculty of Management Studies, University of Central Punjab, Lahore, Pakistan https://orcid.org/0000-0001-7374-8421

Keywords: BEKK-GARCH, commodity futures, spillover index, portfolio managers, portfolio risk, stock futures, volatility transmission

Abstract

Abstract Views: 0

Pakistan is a very volatile market in the eyes of both international and national investors. Market participants mostly use derivative instruments to protect their investments from price fluctuations. However, the use of a particular type of derivative in a trading strategy depends on the type of investors. Speculators and short-term profit seekers use stock futures, while portfolio managers use commodity futures to minimize their portfolio risk. Both types of traders need to develop strategies at the company level; therefore, this study aims to analyze volatility transmission between the stocks of oil and gas sector companies with stock futures and commodity futures (oil, gas, and gold). In this study, the relationship of selected companies in Pakistan’s oil and gas sector (exploration and marketing) are studied on three levels: the relationship of stock with its stock futures at the first level, related commodity futures at the second level, and with unrelated commodity futures at the third level. BEKK-GARCH was used to examine volatility transmission and asymmetric stock linkage with each future. The spillover index was calculated for every stock, with stock futures and each commodity future to determine each pair’s net transmitter or net receiver of volatility. The results determined that stock futures of all companies have no significant volatility transmission. In case of commodity futures, it was found that oil and gas have a natural relevance with the oil and gas sector; therefore, most companies from this sector have significant volatility transmission. Whereas, in case of gold as an unrelated instrument, it has no significant volatility transmission in most companies, thus proving itself to be an alternative investment option for portfolio managers.

Downloads

Download data is not yet available.

References

Ahmed, A. D., & Huo, R. (2021). Volatility transmissions across international oil market commodity futures and stock markets: Empirical evidence from China. Energy Economics, 93, Article e104741. https://doi.org/10.1016/j.eneco.2020.104741

Ajmi, H., Arfaoui, N., & Saci, K. (2021). Volatility transmisison across international markets amid Covid-19 pandemic. Studies in Economics and Finance, 38(5), 926–945. https://doi.org/10.1108/SEF-11-2020-0449

Ali, M. A., Hassan, A., & Shah, N. H. (2019). Relationship between spot prices and futures prices: Evidence from Karachi stock exchange. Journal of Business and Tourism, 5(2), 109–123. https://doi.org/10.34260/jbt.v5i2.144

Ali, R., Mangla, I. U., Rehman, R. U., Xue, W., Naseem, M. A., & Ahmad, M. I. (2020). Exchange rate, gold price, and stock market exus: A quantile regression approach. Risks, 8(3), Article e86. https://doi.org/10.3390/risks8030086

Ali, S., Bouri, E., & Czudaj, R. L. (2020). Revisiting the valuable roles of commodities for international stock markets. Resources Policy, 66, Article e101603.

Ameet, K, Ahmet. S, John W. G. (2024). Volatility connectedness between geopolitical risk and financial markets: Insights from pandemic and military crisis periods. International Review of Economics & Finance, 96, Article e103740. https://doi.org/10.1016/j.iref.2024.103740

Aziz, T., Sadhwani, R., Habibah, U., & Al Janabi. (2020). Volatility spillover among equity and commodity markets. SAGE Open, 10(2), 1–7. https://doi.org/10.1177/2158244020924418

Boako, G., Alagidede, I. P., Sjo, B., & Uddin, G. S. (2020). Commodities price cycles and their interdependence with equity markets. Energy Economics, 91, Article e104884. https://doi.org/10.1016/j.eneco.2020.104884

Borg, E., Kits, I., Junttila, J., & Uddin, G. S. (2022). Dependence between renewable energy related critical metal futures and producer equity markets across varying market conditions. Renewable Energy, 190, 879–892. https://doi.org/10.1016/j.renene.2022.03.149

Cimen, A. (2018). The impact of derivatives on the volatility of Turkish stock market. International Journal of Economic and Administrative Studies, Special Issue, 857–868. https://doi.org/10.18092/ulikidince.430301

Coskun, M. (2023). Dynamic correlations and volatility spillovers between subsectoral clean energy stocks and commodity futures market: A hedging perspective. Journal of Futures Market, 43(12), 1727–1749. https://doi.org/10.1002/fut.22454

Curran, E., Hunt, J., & Mollica, V. (2020). Trading protocols and price discovery: Implicit transaction costs in Indian single stock futures. Journal of Futures Market, 40(11), 1793–1806. https://doi.org/10.1002/fut.22123

Diebold, F. X., & Yilmaz, K. (2012). Better to give than to receive: Predictive directional measurment of volatility spillovers. International Journal of Forecasting, 28(1), 57–66. https://doi.org/10.1016/j.ijforecast.2011.02.006

Dungore, P. P., Singh, K., Pai, R., & McMillan, D. (2022). An analytical study of equity derivatives traded on the NSE of India. Cogent Business and Management, 9(1), Article e2100616. https://doi.org/10.1080/23311975.2022.2100616

Farid, S., Kayani, G. M., Naeem, M. A., & Shahzad, S. J. (2021). Intraday volatility transmission among precious metals, energy and stocks during the COVID-19 pandemic. Resources Policy, 72, Article e102101. https://doi.org/10.1016/j.resourpol.2021.102101

Fousekis, P., & Grigoriadis, V. (2019). How well can investors diversify with commodities? Evidence from a flexible copula approach. Studies in Economics and Finance, 36(2), 183–206. https://doi.org/10.1108/SEF-05-2018-0138

Grier, K. B., Henry, O. T., Olekalns, N., & Shields, K. (2004). The asymmetric effects of uncertainty on inflation and output growth. Journal of Applied Econometrics, 19(5), 551–565. https://doi.org/10.1002/jae.763

Gurbuz, S., & Sahbaz, A. (2022). Investigating the volatility spillover effect between derivative markets and spot markets via the wavelets: The case of Borsa Istanbul. Borsa Istanbul Review, 22(2), 321–331. https://doi.org/10.1016/j.bir.2021.05.006

Hoque, M. E., & Zaidi, M. A. S. (2020). Global and country-specific geopolitical risk uncertainty and stock return of fragile emerging economies. Borsa Istanbul Review, 20(3), 197–213. https://doi.org/10.1016/j.bir.2020.05.001

Hou, Y. G., & Li, S. (2020). Volatility and skewness spillover between stock index and stock index futures markets during a crash period: New evidence from China. International Review of Economics & Finance, 66, 166–188. https://doi.org/10.1016/j.iref.2019.11.003

Huang, J. P., Zhang, Y., & Wang, J. (2023). Dynamic effects of social influence on asset prices. Journal of Economic Interaction and Coordination, 18(3), 671–699. https://doi.org/10.1007/s11403-023-00382-z

Imran, Z. A., Ahad, M., Ahmad, M., & Hameed, I. (2024). Chinese crude oil futures and sectoral stocks : Copula- based dependence structure and connectedness. Studies in Nonlinear Dynamics & Econometrices. https://doi.org/10.1515/snde-2023-0083

Jiang, G. J., Shimizu, Y., & Strong, C. (2020). When trading options is not the only option: The effects of single stock futures trading on options market quality. Journal of Futures Markets, 40(9), 1398–1419. https://doi.org/10.1002/fut.22126

Kang, S. H., & Yoon, S. M. (2019). Dynamic correlation and volatility spillovers across Chinese stock and commodity futures markets. International Journal of Finance and Economics, 25(2), 261–273. https://doi.org/10.1002/ijfe.1750

Kang, S. H., & Yoon, S.-M. (2019). Financial crises and dynamic spillovers among Chinese stock and commodity futures markets. Physica A: Statistical Mechanics and its Applications, 531, https://doi.org/10.1016/j.physa.2019.121776

Khan, S., Ullah, M., Shahzad, M. R., Khan, U. A., Khan, U., Eldin, S. M., & Alotaibi, A. M. (2022). Spillover Connectedness among Global Uncertainties and Sectorial Indices of Pakistan: Evidence from Quantile Connectedness Approach. Sustainability, 14(23), Article e15908. https://doi.org/10.3390/su142315908

Kroner, K. F., & Ng, V. K. (1998). Modeling asymmetric comovements of asset returns. The Review of Financial Studies, 11(4), 817–844. https://doi.org/10.1093/rfs/11.4.817

Lang. K., & Auer. B. R. (2020) The economic and financial properties of crude oil: A review. The North American Journal of Economics and Finance, 52, Article e100914. https://doi.org/10.1016/j.najef.2019.01.011

Lei, L., Aziz, G., Sarwar, S., Waheed, R., & Tiwari, A. K. (2023). Spillover and portfolio analysis for oil and stock market: A new insight across financial crisis, COVID-19 and Russian-Ukraine war. Resources Policy, 85, Article e103645. https://doi.org/10.1016/j.resourpol.2023.103645

Liow, K. H., Song, J., & Zhou, X. (2021). Volatility connectedness and market dependence across major financial markets in China economy. Quantitative Finance and Economics, 5(3), 397–420. https://doi.org/10.3934/QFE.2021018

Magweva, R., Munyimi, M., & Mbudaya, J. (2021). Futures trading and the underlying stock volatility: A case of the FTSE/JSE TOP 40. International Journal of Finance, 6(1), 1–16.

Maitra, D., & Dawar, V. (2018). Return and volatility spillover among commodity futures, stock market and exchnage rate: Evidence from India. Global Business Review, 20(1), 214–237. https://doi.org/10.1177/0972150918803801

Malik, I. R., Shah, A., & Kahn, S. (2019). Gains and cost associated with resumption of SSFs with stringent regulations: A modified approach. Pakistan Business Review, 20(4). http://dx.doi.org/10.2139/ssrn.3054616

Morema, K., & Lumengo, B.-B. (2020). The impact of oil and gold price fluctuations on the South African equity market: Volatility spillover and financial policy implications. Resources Policy, 68, Article e101740. https://doi.org/10.1016/j.resourpol.2020.101740

Naeem, M. A., Peng, Z., Bouri, E., Shahzad, S. J., & Karim, S. (2022). Examining the asymmetries between equity and commodity ETFs during COVID-19. Resources Policy, 79, Article e103048. https://doi.org/10.1016/j.resourpol.2022.103048

Nguyen, D. K., Sensoy, A., Sousa, R. M., & Uddin, G. S. (2020). US equity and commodity futures markets: Hedging or financialization. Energy Economics, 86, Article e104660. https://doi.org/10.1016/j.eneco.2019.104660

Qadir, M., Gulzar, D. S., & Dr Muhammad Owais. (2023). Dynamics of Volatility Spillover among the US and emerging Asian stock markets amid the COVID-19 pandemic. Inverge Journal of Social Sciences, 2(3), 44–64. https://doi.org/10.63544/ijss.v2i3.46

Rastogi, S., & Agarwal, A. (2020). Volatility spillover effect in spot, futures and option markets. Test Engineering and Management, 83(30), 10114–10127.

Rezitis, A. N., Andrikopoulos, P., & Daglis, T. (2023). Assessing the asymmetric volatility linkages of energy and agricultural commodity futures during low and high volatility regimes. Journal of Futures, 44(3), 451–483. https://doi.org/10.1002/fut.22477

Sánchez García, J., Cruz Rambaud, S. (2023). Volatility spillovers between oil and financial markets during economic and financial crises: A dynamic approach. Journal of Economics and Finance, 47, 1018–1040 https://doi.org/10.1007/s12197-023-09634-x

Shah, F., & Khan, N. U. (2019). Initiation of futures contracts and volatility- Usinf firm level data in Pakistan. City University Research Journal, 9(4), 635–647.

Siddique, S., & Roy, P. (2020). Asymmetric information linkages across select futures and spot indices. Journal of Advances in Management Research, 17(3), 397–419. https://doi.org/10.1108/JAMR-10-2019-0197

Singh, S., Rastogi, S., & Bhimavarapu, V. M. (2020). Do informed investors prefer futures? International Journal of Modern Agriculture, 9(3), 257–262.

Soni, R. K., & Nandan, T. (2022). Modeling Covid-19 contagious effect between asset markets and commodity fuutres in India. Resources Policy, 79, Article e103061. https://doi.org/10.1016/j.resourpol.2022.103061

Umar, Z., Jareno, F., & Escribano, A. (2020). Static and dynamic connectedness between oil price shocks and Spanish equities: A sector analysis. The European Journal of Finance, 27(9), 880–896. https://doi.org/10.1080/1351847X.2020.1854809

Woo, M., & Kim, M. A. (2021). Option volume and stock returns: Evidence from single stock options on the Korea exchange. Journal of Derivatives and Quantitative Studies, 29(4), 280–300. https://doi.org/10.1108/JDQS-06-2021-0012

Zaidi, S. B., Khan, A., Khan, S., Rehman, M. Z., Alonazi, W. B., & Noman, A. A. (2023). Connectedness between Pakistan’s stock markets with global factors: An application of quantile VAR network model. Mathematics, 11(19), Article e4177. https://doi.org/10.3390/math11194177