International Journal of Energy and Statistics Vol. 1, No. 1 (2013) 17–29 c  Institute for International Energy Studies DOI: 10.1142/S2335680413500026 OIL PRICES AND STOCK MARKET CORRELATION: A TIME-VARYING APPROACH NIKOLAOS ANTONAKAKIS ∗,‡ and GEORGE FILIS †,§ ∗ Department of Economics and Finance, University of Portsmouth, PO1 3DE, UK † Department of Accounting, Finance and Economics, Bournemouth University, BH8 8EB, UK ‡ nikolaos.antonakakis@port.ac.uk § gfilis@bournemouth.ac.uk Received 31 January 2013 Revised 7 February 2013 Accepted 8 February 2013 Published 27 March 2013 This paper examines the influence of oil prices on stock market time-varying correlation. Five stock market indices from both oil-importing (US, UK and Germany) and oil- exporting economies (Canada and Norway) are considered for the period 1988-2011. The findings from the DCC-GARCH framework suggest that the effects of oil price changes on stock market correlation are not constant over time and they depend on the status of the economy, i.e. whether it is oil-importing or oil-exporting. In addition, utilising the identification of oil price shocks in [1], [2] and [3] it is found that the aggregate demand shocks and precautionary demand shocks tend to exercise a negative effect on stock market correlation, whereas no effects from the supply-side oil price shocks can be reported. These findings have important implications for international portfolio diversifications and risk management. Keywords : Stock market correlation; Oil price; DCC-GARCH; Oil-importing; Oil- exporting. 1. Introduction and a Brief Literature Review Since the seminal paper by Jones and Kaul [4], there is a growing interest on the effects of oil prices on stock market performance. However, the literature has ignored the possible effects of oil prices on the co-movements between stock markets. This paper fills this void by focusing on the effects of oil prices on stock market corre- lation. More specifically, these effects are examined in a time-varying environment for both oil-exporting and oil-importing economies. Many authors subscribe to the belief that a negative relationship exists between oil price changes and stock market returns (see, among others, [5-13]). Furthermore, 17 Int. J. Energy Stat. 2013.01:17-29. Downloaded from www.worldscientific.com by UNIVERSITY OF PORTSMOUTH LIBRARY on 07/25/13. For personal use only.