Volatility spillovers across financial markets: the role of oil price uncertainty

Abstract

This paper analyzes the state-dependent volatility transmission mechanism between oil, stock, dollar, and bond prices to further examine the role of oil price uncertainty in financial markets. To this end, we extend the Diebold and Yilmaz (2014) spillover framework by incorporating a Markov-switching model and a Bayesian MCMC algorithm. We find that oil prices spills the highest degree of volatility to other markets during crises. The interdependence between the stock and oil markets is solid and stable, regardless of the regime shift. In contrast, the effect of oil price uncertainty on the foreign exchange or bond market during crises is double that during non-crisis periods. This suggests that oil price is closely related to other asset classes and reinforces its role as a risk transmitter during a crisis.