Transmission of shocks between bond and oil markets

Purpose This paper aims at looking into the transmission of shocks between bond and oil markets using a bivariate GARCH (BEKK and DCC) model. As lots of financial assets have been exchanged due to these index returns, it is essential for financial market participants to figure out the mechanism of volatility transmission through time and via these series for the purpose of taking optimal decisions of portfolio allocation. The outcomes drawn reveal an important volatility transmission between sovereign bond and oil indices, with great sensitivity during and after the subprime crisis period. Design/methodology/approach In this context, we propose our hypotheses. Indeed, our study aims to see whether the financial crisis has been responsible for the sharp drop in oil prices since October 2008. To this end, we suggest, in this paper, the empirical study of the shock transmission between the bond and oil markets, using BEK-GARCH and DCC models. To our knowledge, this is the first document using the BEKK-GARCH and the DCC models in studying the shock transmission between a sovereign bond and oil indices. Findings We have noticed that in the event of a disruption in the bond market, oil prices respond to these shocks in the short term. It has also been emphasized, however, that this relationship has exacerbated if the period has extended. This makes us conclude that the financial market situation affects the oil price only throughout the crisis period; and that this situation is causally significant only in the event of a severe crisis, such as those of subprime and sovereign debt. Originality/value The global financial system has been going through an acute crisis since mid-2007. This crisis, initially occurred only in the US real estate market, progressively affects the global financial system, and is now becoming a general economic crisis. The objective of this work is to analyze the effects of the current financial market disturbance on oil prices based on econometric models in order to promote the proper functioning of this study.