Stock market returns and oil price shocks: A CoVaR analysis based on dynamic vine copula models

Crude oil plays a significant role in economic developments in the world. Understanding the relationship between oil price changes and stock market returns helps to improve portfolio strategies and risk positions. Kilian (Am Econ Rev 99(3): 1053–1069, 2009) proposes to decompose the oil price into three types of oil price shocks by using a structural vector autoregression model. This paper investigates the dynamic, nonlinear dependence and risk spillover effects between BRICS stock returns and the different types of oil price shocks using an appropriate multivariate and dynamic copula model. Risk is measured using the conditional value at risk, conditioning on one or more simultaneous oil and stock market shocks. For this purpose, a D-vine-based quantile regression model and the GAS copula model are combined. Our results show, inter alia, that the early stages of the Covid-19 crisis lead to increasing risk levels in the BRICS stock markets except for the Chinese one, which has recovered quickly and therefore shows no changes in the risk level.