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Co-movement and Dynamic Correlation of Financial and Energy Markets: An Integrated Framework of Nonlinear Dynamics, Wavelet Analysis and DCC-GARCH

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Abstract

In this paper, we analyze the inherent evolutionary dynamics of financial and energy markets. We study their inter-relationships and perform predictive analysis using an integrated nonparametric framework. We consider the daily closing prices of BSE Energy Index, Crude Oil, DJIA Index, Natural Gas, and NIFTY Index representing natural resources, developing and developed economies from January 2012 to March 2017 for this purpose. DJIA and NIFTY account for the global financial market while the other three-time series represent the energy market. First, we investigate the empirical characteristics of the underlying temporal dynamics of the financial time series through the technique of nonlinear dynamics to extract the key insights. Results suggest the existence of a strong trend component and long-range dependence as the underlying pattern. Then we apply the continuous wavelet transformation based multiscale exploration to investigate the co-movements of considered assets. We discover the long and medium-range co-movements among the heterogeneous assets. The findings of dynamic time-varying association reveal interesting insights that may assist portfolio managers in mitigating risk. Finally, we deploy a wavelet-based time-varying dynamic approach for estimating the conditional correlation among the said assets to determine the hedge ratios for practical implications.

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Authors and Affiliations

  1. Calcutta Business School, Kolkata, India

    Indranil Ghosh

  2. Department of Business Administration, University of Kalyani, Kalyani, India

    Indranil Ghosh & Manas K. Sanyal

  3. Operations and Quantitative Methods Area, Indian Institute of Management Raipur, Raipur, CG, 493661, India

    R. K. Jana

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  1. Indranil Ghosh
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  2. Manas K. Sanyal
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  3. R. K. Jana
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Correspondence to R. K. Jana.

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Ghosh, I., Sanyal, M.K. & Jana, R.K. Co-movement and Dynamic Correlation of Financial and Energy Markets: An Integrated Framework of Nonlinear Dynamics, Wavelet Analysis and DCC-GARCH. Comput Econ 57, 503–527 (2021). https://doi.org/10.1007/s10614-019-09965-0

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