The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0144-3585.htm
JES
45,2
426
Received 30 January 2017
Revised 28 August 2017
Accepted 16 September 2017
Journal of Economic Studies
Vol. 45 No. 2, 2018
pp. 426-440
© Emerald Publishing Limited
0144-3585
DOI 10.1108/JES-01-2017-0025
Volatility spillover from crude oil
and gold to BRICS equity markets
Vikas Pandey and Vipul
Department of Finance and Accounting,
Indian Institute of Management Lucknow, Lucknow, India
Abstract
Purpose – The purpose of this paper is to investigate the volatility spillover from crude oil and gold to the
BRICS stock markets, after removing the effect of co-movement of prices of crude oil and gold.
Design/methodology/approach – Three multivariate GARCH models (dynamic conditional correlation,
constant conditional correlation, and Baba, Engle, Kraft and Kroner) are used to capture the dynamic
relationship between the crude oil and gold returns. The innovations from gold and oil are orthogonalized,
and the EGARCH model is employed for the spillover analysis. The influences of oil price shocks and gold
price shocks are tested on the returns of each of the BRICS equity markets.
Findings – There is evidence of volatility spillover from both the crude oil and gold to the BRICS stock
markets. A sub-sample analysis suggests that the volatility spillover from gold was not significant before the
financial crisis of 2008, but became significant post-crisis. The volatility asymmetry, which was not
significant before the crisis, also became significant after it.
Originality/value – This study examines the volatility spillover to the BRICS stock markets from crude oil
and gold, after accounting for the co-movement in their prices. It can help equity investors to judge whether
gold can provide incremental diversification benefit, if used in conjunction with crude oil. The study also
provides insights into the changes caused by the 2008 financial crisis on this volatility spillover mechanism.
Keywords EGARCH, BRICS stock markets, BEKK GARCH, Crude oil volatility spillover,
Gold volatility spillover, Volatility asymmetry
Paper type Research paper
1. Introduction
Financial and commodity markets are getting more integrated due to the increased cross-
broader movement of goods, services, technology, and capital; causing co-movement in
prices in these markets. This co-movement has obvious implications for hedging and
diversification, particularly during volatile periods. In this context, the linkage of
commodity markets with financial markets is an important area of research. Crude oil and
gold are the two highly traded commodities in the world. Fluctuations in crude oil prices
directly impact the input cost of production, and may have a direct effect on the inflation
rate (Hamilton, 1996) and balance of trade. Because the cash flows and rates of return of
most of the business entities are directly influenced by a change in oil prices, stock prices
may respond to such a change. In contrast to the crude oil, the volatility of gold prices is
low, making it a safe investment asset. The investment in gold is regarded as a hedge
against inflation (Hood and Malik, 2013; Le and Chang, 2012; Reboredo, 2013). Gold can
also be used for investment diversification, due to the low correlation of its price returns
with those of the other asset classes. For these reasons, it is considered an important
investment choice during recession, and most of the central banks allocate a significant
portion of their investments to gold. Therefore, it is important to study how the
price volatility and shocks are transmitted from crude oil and gold markets to the
equity markets.
The present study contributes to the existing literature by examining the crude and gold
price volatility spillover to the equity markets of BRICS countries. Both crude oil and gold
are used for hedging and diversification. Crude oil prices are often linked to inflation,
whereas gold is seen as a hedge against inflation. It is probable that crude oil and gold
markets are linked together. One of the major contributions of this study is the investigation
of volatility spillover from gold to the BRICS equities, after removing the effect of Volatility
co-movement of prices of crude oil and gold. Previous studies have examined the spillover spillover
from crude oil and gold to the developed and emerging market separately, which could
mislead if their price movements are not independent. The segregation of the effects of gold
and crude oil volatilities helps a BRICS equity investor in judging as to whether a position in
crude oil or gold can effectively diversify her equity portfolio. The study also examines
whether this spillover mechanism has undergone a change after the financial crisis of 2008. 427
This is in the context of the contention that the correlation between stock markets and
commodities has increased after the financial crisis, owing to financialization of commodities.
This study confirms the volatility spillover from crude oil and gold to the BRICS equity
markets. It also confirms that the conditional volatilities are higher in the downtrend as
compared to the uptrend of similar magnitude (volatility asymmetry). A sub-sample
analysis suggests that the volatility spillover from gold to the BRICS stock markets, which
was not significant before the financial crisis of 2008, became significant after it. The
volatility asymmetry also became significant for all the BRICS stock markets after the crisis.
The rest of the paper is organized as follows. The next section provides a brief overview
of the literature. Section 3 describes the data used for this study. Section 4 describes the
econometric models used for examining the volatility spillover. Section 5 discusses the
results, and the last section concludes the paper.

2. Literature review
A number of studies have investigated the volatility spillover from crude oil to the stock
markets. Jones and Kaul (1996) investigated the reaction of international stock markets to oil
price shocks. They found that the current and future cash flows explained the impact of
crude oil prices on the USA and Canadian stock markets; whereas, for the UK and Japan, the
volatilities were in excess of what could be explained by cash flows. Huang et al. (1996)
found that oil price returns are not correlated with stock price returns, except for the oil
companies’ stocks. Sadorsky (1999) found that the changes in oil price have an impact
on the economic activities, but the converse in not true. His results also suggested that a
positive oil price shock has a negative impact on the real stock returns. Hedi Arouri and
Khuong Nguyen (2010) studied the relation between oil prices and the stock market at the
aggregate and sector levels, to find a significant linkage between these. Sadorsky (2012)
used the multivariate GARCH model to examine the transmission of volatility between the
oil prices, and clean energy and technology companies. His results suggested that the stock
prices of clean energy companies correlate more with the technology stock prices than with
the oil prices. Chang et al. (2013) examined the conditional correlation and volatility
spillover, using the multivariate GARCH model, and found no evidence of linkage between
crude oil and financial markets. Mensi et al. (2013) examined the volatility spillover between
S&P 500 and commodity indices, and found significant transmission between the two
markets. The shocks and volatility of S&P 500 significantly influenced the oil and gold
markets. Nazlioglu et al. (2013) examined the volatility transmission between oil and selected
agricultural commodity prices, and found no evidence of volatility spillover for the pre-crisis
period. However, for the post-crisis period, they found evidence of volatility spillover from
crude oil to agricultural commodities, except for sugar. B. Lin et al. (2014) found evidence of
volatility spillover from oil to the Ghana stock market.
The studies on gold prices have covered many aspects, such as volatility spillover,
hedging, and diversification. Melvin and Sultan (1990) concluded that the oil prices and
political stability are important elements in determining the gold price volatility. Capie et al.
(2005) examined the weekly gold prices, and concluded that gold could be used as a hedge
against the fluctuation of the foreign exchange value of US dollar. Reboredo (2013)
suggested that gold cannot be used as a hedge against the fluctuations of oil prices.
JES Baur and McDermott (2010) investigated the role of gold as a safe haven, and showed that it
45,2 indeed acted as a safe haven for the European and US markets, but not for the emerging
markets. Raza et al. (2016) studied the effects of gold and oil volatilities on the stock markets
of emerging economies, to find that the gold and oil volatilities inversely impact the
volatility of equity markets.

428 3. Data
Weekly data have been employed for the study, for the period January 2000 to December 2015.
The prices are extracted from Bloomberg database. Morgan Stanley Capital International
indices are used as the proxy for the BRICS equity markets. For the crude oil prices, West Texas
Intermediate (WTI) data from the spot market at Cushing, Oklahoma, are used, which acts as
the settlement price for the WTI crude futures on the New York Mercantile Exchange. The gold
spot prices are taken from Bloomberg. All the prices are in US dollars, to nullify the impact of
exchange rates on the spillover. Weekly data are used to reduce the effect of non-synchronous
trading. Consistent with the previous studies, this study also uses the return series for the
analysis, as the price series may contain unit root. The return is calculated

as the natural log of
the ratio of current price and one-week lagged price, i.e. r it ¼ log pit =pi;t1 , where rit is the
return of ith security for the tth week, and pit is the price of the ith security at the end of
the tth week. Table I provides the descriptive statistics for all the return series. The mean
returns for all the indices are positive, with gold providing the maximum mean return, and the
Brazilian equity, the minimum. Gold is the least volatile security in the sample, and the Russian
equity, the most volatile. All the returns are leptokurtic and negatively skewed. The Jarque-Bera
test rejects the null hypothesis of normality for all the return series at 1 percent level of
significance, which confirms that the return series are not normally distributed.
Table II reports the unconditional correlation for all the return series. The equity index
returns of all the countries have low correlations with crude oil and gold returns.

Crude Gold India China Russia Brazil South Africa

Mean 0.05 0.16 0.13 0.06 0.07 0.02 0.08

SD 4.74 2.52 3.91 4.02 5.57 5.21 4.03
Skewness −0.60 −0.29 −0.55 −0.46 −0.13 −0.63 −0.14
Kurtosis 2.22 1.66 2.92 2.54 6.42 4.60 5.17
Jarque-Bera 222.27*** 107.88*** 338.18*** 253.37*** 1434.19*** 790.78*** 930.40***
Minimum −23.73 −10.14 −21.90 −22.05 −28.06 −33.06 −20.29
Maximum 20.61 12.35 18.37 17.95 42.75 25.62 29.14
LB (5) 10.88** 8.66 20.65*** 6.89 5.50 13.19** 13.25**
Table I. ARCH test 117.35*** 100.46*** 79.59*** 62.49*** 201.66*** 185.39*** 196.88***
Descriptive statistics Notes: LB is Ljung-Box test for serial correlation. **,***Significant at 5 and 1 percent levels, respectively

Crude Gold India China Russia Brazil South Africa

Crude 1
Gold 0.2256 1
India 0.1679 0.1622 1
China 0.1755 0.1455 0.5432 1
Table II. Russia 0.3711 0.1928 0.4456 0.4258 1
Unconditional Brazil 0.3436 0.2319 0.4867 0.4951 0.5989 1
correlation South Africa 0.3211 0.3412 0.5435 0.5402 0.6120 0.6569 1
The correlation between the returns of crude oil price and Russian equity index is the Volatility
highest, which can be attributed to the fact that Russia is a major crude oil exporting spillover
country. Similarly, gold has the highest correlation with South African equity index, as
South Africa is a major gold producing country.

4. Methodology
We follow the approach of Ng (2000), and Alotaibi and Mishra (2015) to examine the crude 429
oil and gold volatility spillovers. First, a bivariate GARCH model is estimated for the joint
process governing the oil and gold returns, assuming that the gold prices are driven by oil
shocks and idiosyncratic shocks of gold prices. Next, to understand the mechanics of
volatility spillover to the equity markets, a univariate EGARCH model is estimated for the
stock market returns for BRICS countries, separately.

4.1 Bivariate model for gold and crude oil returns

The relation between mean and variance of the returns of gold and crude oil are assessed
with the following bivariate GARCH (1, 1) models.
Mean equation:
! ! ! ! !
Rgold;t agold;t bgold;1 bgold;2 Rgold;t1 egold; t
¼ þ þ (1)
Roil;t aoil;t boil;1 boil;2 Roil; t1 eoil;t

eit 9I t1 eN ð0; H t Þi ¼ 1ðgoldÞ; 2ðoilÞ

where (Rgold, t, Roil, t)’ is the vector of returns of gold and oil prices. The first term on the right
hand side is the (2×1) vector of intercepts; (βgold, 1, βgold, 2; βoil, 1, βoil, 2) is the (2 × 2) matrix of
coefficients of autoregressive terms of the returns of gold and oil; and the third term is the
(2 × 1) vector of residuals. Ht is the conditional variance-covariance matrix. To capture the
dynamic relation between the oil and gold returns, multivariate GARCH models
are employed. Such models are extensively used by financial researchers to model the
conditional variance-covariance matrix. (Haixia and Shiping, 2013; Majdoub and Mansour,
2014; Mensi et al., 2014; Olson et al., 2014; Li and Giles, 2015; Khalfaoui et al., 2015;
Hassouneh et al., 2016). This study employs three different bivariate specifications for the
conditional variance-covariance matrix: constant conditional correlation (CCC) model,
dynamic conditional correlation (DCC) model, and Baba, Engle, Kraft and Kroner (BEKK)
model. The parameters of the bivariate models are estimated by maximizing the
log likelihood function, assuming normally distributed errors. The log likelihood function
is given by:

T  
1X
LðyÞ ¼ T log ð2pÞ log jH t j þet0 H 1
t et
2 t¼1

where T is the total number of observations, and θ is the vector of parameters that need to
be estimated. RATS software version 9.10 is used for all the computations. Initial values
for the parameters are obtained by simplex algorithms, and final estimates of the
parameters are obtained by using the Broyden-Fletcher-Goldfrab-Shanno algorithm.
4.1.1 CCC model. Bollerslev (1990) derived the CCC model with the assumption that the
conditional correlation between variables is constant. In this model, the covariance is
decomposed into the product of correlation and standard deviations, and the temporal
JES variations in the covariance are determined solely by the conditional variances:
45,2 1=2 1=2
H t ¼ Dt GDt (2)
where Dt is the diagonal matrix of conditional variances, and Γ is the constant correlation matrix.
Thus:
!
430 h11t 0
Dt ¼ diagðH t Þ ¼ (3)
0 h22t

and:

hiit ¼ oi0 þoi1 E2it1 þoi2 hiit1 ; (4)

Here, ωi0, ωi1, and ωi2 are the estimated parameters. The main advantage of CCC model is
that it can be easily estimated. Also, if the conditional variances in Dt are all positive definite,
and Γ is also positive definite, then the conditional covariance matrix Ht is guaranteed to be
positive definite, for all t.
4.1.2 DCC model. Engle (2002) proposed the DCC model to capture the time-varying
conditional correlation. In this model, the univariate GARCH model is used to estimate the
conditional variance of each return series, and the conditional correlation matrix follows.
The DCC model is estimated in two stages. In the first stage, the univariate GARCH models
are estimated and their residuals are obtained. In the second stage, the residuals obtained
from the first stage are standardized, and used to estimate the parameters for the dynamic
correlation. Equations (2)-(4) are then applied on the dynamic covariance and correlation. !
q11 q12
For estimating the dynamic correlation, the variance-covariance matrix Qt ¼
q21 q22
is specified by the DCC model as:
" # " # " #
q11;t q12;t q11 q12 m1;t1 h i
¼ ð1D1 D2 Þ þD1 m1;t1 m2;t1
q12;t q22;t q12 q22 m2;t1
" #
q11;t1 q12;t1
þD2 (5)
q12;t1 q22;t1

pffiffiffiffiffiffiffi
Here, mit ¼ ei;t = sii;t are" the standardized
# residuals of gold and oil obtained from
q11 q12
Equations (1) and (4); Q ¼ is the unconditional variance-covariance matrix of
q12 q22
the standardized residuals, resulting from the first stage estimation; Δ1 and Δ2 are the
estimated parameters. The dynamic process of the variance-covariance matrix Qt is used to
estimate the dynamic correlation matrix Γt:

Gt ¼ diagfQt g1=2 Qt diagfQt g1=2 (6)

4.1.3 Bivariate BEKK model. In the BEKK model, the covariance matrix is given by:

H t ¼ C 0 C þA0 et1 e0t1 AþB0 H t1 B (7)

where A, B and C are n × n matrices of parameters, and C is an upper triangular matrix.
BEKK is expressed in quadratic form to ensure that the Ht matrix is positive definite.
The bivariate BEKK can also be written as: Volatility
spillover
" # " #" #0
s11;t s12;t c11;t c21;t c11;t c21;t
¼
s12;t s22;t 0 c22;t 0 c22;t
" #" #" #0
a11;t a12;t e21;t1 e1;t1 e2;t2 a11;t a12;t 431
þ
a21;t a22;t e1;t1 e2;t2 e22;t1 a21;t a22;t
" #" #" #0
b11;t b12;t s11;t1 s12;t1 b11;t b12;t
þ
b21;t b22;t s21;t1 s22;t1 b21;t b22;t

4.2 Univariate volatility spillover model

Following Bekaert and Harvey (1997), Ng (2000), and Alotaibi and Mishra (2015), the
volatility spillover from crude oil and gold is expected to be reflected by the influence of
innovations in their returns on the stock returns, through the error terms. In this study, the
asymmetric volatility spillover model is employed. In this model, the returns of each
BRICS equity market are determined by its idiosyncratic shocks, the oil market shocks,
and the gold market shocks. The exponential GARCH (EGARCH) model is employed for
the spillover analysis to capture the volatility asymmetry often found in equity market
returns, and to avoid the non-negativity constraints applicable to the simple GARCH
model. The univariate volatility spillover model, for each BRICS market j, is specified
as follows:

Rj;t ¼ aj þbj Rj;t1 þgj Roil;t1 þdj Rgold;t1 þej;t (8)

ej;t ¼ ej;t þ jj eoil;t þ|j egold;t


ej;t I t1 e Nð0; s2j;t Þ

where ej, t is a purely idiosyncratic shock, which is assumed to follow a conditional normal
distribution, with mean zero and variance s2j;t . The crude oil return shock, eoil,t and gold
return shock, egold, t are assumed to be uncorrelated with ej,t. The conditional variance s2j;t
follows an EGARCH(1,1) process:
   
   
log s2j;t ¼ aj;0 þyj zj;t1 þaj;1 zj;t1 E zj;t1  þaj;2 log s2j:t1 (9)

where zj, t ¼ (εt)/(σt). The parameter θj measures the asymmetric effect of volatility.
A negative and statistically significant θj indicates that the volatility asymmetry is
present in the market.
This model helps in identifying the relative effect of oil and gold on the stock markets.
However, it is also possible that both the prices of crude oil and gold are influenced by the
same underlying information. To overcome this problem, the innovations from gold and
oil are orthogonalized, assuming that the oil return shocks are (partially) a causal
factor for the gold return shocks (and not the other way around). This approach is based
on the earlier findings that the oil price shocks have a significant impact on the gold
prices (Zhang and Wei, 2010; Le and Chang, 2012; Tiwari and Sahadudheen, 2015).
JES The orthogonalized gold and oil innovations, denoted by egold,t and eoil,t, respectively, are
45,2 given by:
" # 2 Cov t1 ðeoil;t ;egold;t Þ
3" #
egold;t 1 egold;t
¼ 4 var ð e
t1 oil;t Þ 5 (10)
eoil;t eoil;t
0 1
432 After this orthogonalization, the residual gold shocks are unrelated to oil shocks. The model
then implies:
" #
e2j;t 2
E ¼ hj;t ¼ s2j;t þj2j s2oil;t þ|j s2gold;t (11)
I t1

Equation (11) states that the conditional variance of the returns for each BRICS equity
market depends on the variance of oil, gold, and its own idiosyncratic variance. The
coefficients φ and | reflect the volatility spillover from oil and gold markets, respectively.

4.3 Variance ratio

Variance ratio captures the relative contribution of oil and gold shocks on the volatility of
each of the BRICS countries equity markets returns. The variance ratios of crude oil and
gold are computed as follows:
j2j s2oil;t
VRoil
j;t ¼ (12)
hj;t

2
|j s2gold;t
VRgold
j;t ¼ (13)
hj;t
gold
Here, VRoil
j;t and VRj;t are the effects of shocks from oil and gold markers, respectively, at
time t on the return of BRICS market in country j.

4.4 Specification tests

Specification tests are used to check whether the bivariate models are correctly specified,
and to compare their performance. Ng (2000) follows the framework of Richardson and
Smith (1993) and tests for the orthogonality conditions implied by a bivariate normal
distribution. Standardized residuals are estimated as z^t ¼ C 01
t e^t where Ct is the Cholesky
decomposition of Ht. Under the assumption that the model is correct, the standardized
residuals should have zero mean, identity covariance matrix, and no serial correlation in the
first or second moments, that is:

E z^i;t z^i;ts ¼ 0 for i ¼ oil; gold (14)

h  i
E z^2i;t 1 z^2i;ts 1 ¼ 0 for i ¼ oil; gold (15)




E z^oil;t z^gold;t z^oil;ts z^gold;ts ¼ 0 (16)
The test statistics have been computed for ten time lags, that is, s ¼ 1, …, 10. If the
standardized residuals are normally distributed, then the corresponding test statistics
would be asymptotically distributed as χ2(10). The null hypothesis, that z^ t follows a
bivariate normal distribution, is tested by examining the following restrictions on the Volatility
third and fourth moments: spillover
h i
E z^3i;t ¼ 0 for i ¼ oil; gold (17)

h i
E z^2oil;t z^gold;t ¼ 0 (18) 433
h i
E z^oil;t z^2gold;t ¼ 0 (19)

h i
E z^4i;t 3 ¼ 0 for i ¼ oil; gold (20)

h i
E z^2oil z^2gold 1 ¼ 0 (21)

Here, Equations (17) and (20) test the skewness and the excess kurtosis, respectively.
Equations (18) and (19) test the cross-skewness, and Equation (21) tests the cross-excess
kurtosis. The tests are based on an asymptotic χ² distribution, with 1 degree of freedom.

5. Results
The results of unit root tests for the return series of gold, crude oil and BRICS stock markets
are presented in Table III. The null hypothesis of unit root is rejected for all the return series
at 1 percent level of significance.

5.1 Specification test results

Table IV presents the results of specification tests conducted to identify the appropriate
bivariate model for investigating the transmission of shocks from the crude oil and gold
markets to the BRICS stock markets. The univariate test results of Panel A show no
evidence of serial correlation, for both the crude oil and gold conditional means, in any of the
three models. However, there is evidence of serial correlation in ð^z2i;t 1Þð^z2i;ts 1Þ for the CCC
and DCC models in gold.
The results for the bivariate normality tests are given in Panel B of Table IV.
The normality assumption is violated for crude oil, as the skewness is significantly different
from 0, for all the three models.
The gold test results for skewness and excess kurtosis support the normality assumption
in the residuals, for all the three models. Since the BEKK GARCH model produces the best
results among the chosen models, we accept BEKK as the right specification for the
bivariate model, for both crude oil and gold.

t-statistic p-value

Crude −30.33 0.00

Gold −29.67 0.00
India −26.56 0.00
China −30.08 0.00 Table III.
Russia −29.56 0.00 Augmented
Brazil −32.04 0.00 Dickey-Fuller test
South Africa −31.34 0.00 for unit root
JES Panel A: specification test of serial correlation
45,2 Meana Variancea
Model Crude Gold Crude Gold Covariancea
BEKK
Test statistics 9.318 7.4547 15.3975 22.9705 11.3411
p-value 0.5022 0.6819 0.1182 0.0108 0.3315
434 DCC
Test statistics 10.3589 7.7785 17.2456 28.8694 7.3357
p-value 0.4096 0.6504 0.0691 0.0013 0.6931
CCC
Test statistics 10.6502 8.1357 17.1062 30.4755 12.4941
p-value 0.3854 0.6155 0.072 0.0007 0.2533
Panel B: bivariate normality test
Skewnessb Excess kurtosisb Cross-skewnessb
Model Crude Gold Crude Gold Crude Gold Cross-excess kurtosisb
BEKK
Test statistics 8.3847 0.0054 1.8707 2.3425 0.4286 8.3526 1.1190
p-value 0.0037 0.9404 0.1713 0.1258 0.5132 0.0038 0.2901
DCC
Test statistics 8.2088 0.0519 1.9912 1.5711 0.7188 7.9034 20.8670
p-value 0.0041 0.8197 0.1582 0.2100 0.3967 0.0040 0.0039
CCC
Test statistics 8.6111 0.3257 1.9972 1.3452 0.3519 6.5646 0.9891
Table IV. p-value 0.0000 0.5681 0.1575 0.2461 0.5530 0.0104 0.3199
Specification test Notes: aThe test statistics are distributed as χ²(10); bthe test statistics are distributed as χ²(1)

5.2 Univariate volatility spillover tests

The test results for the univariate spillover model are presented in Table V. The values of
parameter of volatility asymmetry (θ), which are negative and significant for all the BRICS
stock indices, confirm the presence of volatility asymmetry. This implies that the impact of
negative news is more pronounced on the stock markets than that of positive news. Higher
volatility follows the negative shocks more often than the positive shocks. Both, the effects
of innovation and persistence (represented by the coefficients a1 and a2) are also positive
and significant for all the BRICS stock markets, confirming the appropriateness of the
EGARCH model employed.
Except for India, the weekly stock market returns for the BRICS countries are not
significantly affected by their one-week lagged returns. The returns spillover coefficient of
crude oil (γ) is significant only for China and Russia; whereas, for gold, no stock market has
significant returns spillover coefficient. The effect of crude oil on Chinese and Russian stock
markets can be attributed to the fact that Russia is a major producer of crude oil, and China
is world’s second largest consumer of crude oil.
The coefficients of the lagged shocks (a1) for all the BRICS markets are significant.
This suggests a strong effect of volatility innovation on the return series, which is the
highest (0.24) for the Russian stock returns, and the lowest (0.12) for the South African
returns. The coefficients capturing the persistence of volatility (a2) are also significant
for all the countries’ stock indices. Except for South Africa, a2 is close to 1 for all the
markets, which suggests that the shocks to the conditional variance take substantial time
to die down.
Parameters India China Russia Brazil South Africa
Volatility
spillover
α 0.16 (1.41) 0.12 (1.38) 0.05 (0.45) −0.04 (−0.29) 0.08 (0.72)
β 0.10*** (2.89) −0.05 (−1.60) −0.02 (−1.19) −0.06 (−1.59) −0.03 (−1.04)
γ −0.03 (−1.35) 0.06*** (3.63) 0.09*** (2.96) 0.03 (0.74) 0.02 (0.94)
δ 0.03 (0.68) 0.03 (0.67) −0.06 (−1.21) −0.01 (−0.20) −0.01 (−0.14)
φ 0.13*** (6.08) 0.17*** (7.41) 0.41*** (15.30) 0.35*** (10.74) 0.20*** (10.20)
| 0.17*** (3.89) 0.18*** (4.69) 0.24*** (4.66) 0.39*** (6.37) 0.48*** (11.54)
435
a1 0.18*** (4.24) 0.21*** (6.65) 0.24*** (4.20) 0.13*** (4.73) 0.12*** (3.11)
a2 0.96*** (57.17) 0.96*** (72.19) 0.96*** (51.80) 0.96*** (77.10) 0.83*** (19.39)
θ −0.07*** (−2.98) −0.08*** (−3.35) −0.08*** (−3.31) −0.10*** (−5.04) −0.25*** (−6.00)
Diagnostic test on standardized residuals
Ljung-Box Q
test (10) 10.76 7.99 6.60 5.97 9.52
McLeod-Li
test (10) 6.44 9.82 9.32 4.86 12.90
Notes: α is the intercept, and β is the first-order autoregressive term of the mean equation for a country. γ and
δ are the lagged-return spillovers from the crude oil and gold respectively. φ and | are the volatility spillovers
from the crude oil and gold, respectively. θ is the volatility asymmetry measure, and a1 and a2 are the
innovation and persistence parameters of the EGARCH model. Ljung-Box test and McLeod-Li test are applied Table V.
on the standardized residuals and squared standardized residuals, respectively. ***Significant of the Univariate spillover
t-statistics (given in parentheses) at 1 percent level test results

The volatility spillover coefficients of crude oil and gold (φ and |) are significant for all the
BRICS stock markets. The crude oil volatility spillover coefficient ranges from 0.13 (for
India) to 0.41 (for Russia), whereas the gold volatility spillover coefficient ranges from
0.17 (for India) to 0.48 (for South Africa). The magnitudes of volatility spillover from crude
oil and gold are almost equal for India and China. For Russia, the crude oil volatility
spillover is greater than the gold volatility spillover; whereas for South Africa, the gold
volatility spillover is greater than the crude oil volatility spillover. This can be attributed to
the fact that Russia and South Africa are the major producers of crude oil and gold
respectively, which have a major impact on the respective country’s economy. The overall
results suggest that both the crude oil and gold volatilities are impacting the volatility of
BRICS stock markets in their own right.
5.2.1 Variance ratios. Variance ratio captures the relative importance of crude oil or
gold variance spillover in explaining the overall variance of the BRICS equity market.
The variance ratios for the spillovers from crude oil and gold, and individual stock markets’
idiosyncratic shocks are presented in Table VI.
For Russia and Brazil, the variance ratio for crude oil is 16.98 and 10.52 percent,
respectively. For India, China and South Africa, it is 4.99, 6.26 and 3.4 percent,
respectively. The relative influence of gold shocks is not significant as compared to the
crude oil shocks to the BRICS equity markets. Only for South Africa, the gold variance
ratio (4.19 percent) is higher than the oil variance ratio (3.4 percent). For India, China,
Russia and Brazil, it is 1.54, 1.41, 1.21 and 2.56 percent, respectively. The crude oil prices
appear to influence the BRICS equity markets much more than the gold prices. This could
be attributed to the fact that crude oil has a direct linkage with the performance of most of
the economies as a major source of energy. For Russia and Brazil, this linkage is stronger
due to the crude oil production accounting for a major part of their economy. For a similar
reason, the impact of gold shocks is marginally higher than that of crude oil shocks for the
South African equity market.
JES 5.3 Sub-sample analysis
45,2 There is apprehension that the financial crisis of 2008 might have caused certain structural
changes affecting the spillover mechanism. To address this issue, we examine the volatility
spillover from crude oil and gold to the BRICS stock markets before and after the crisis.
The data sample is divided into two periods: the pre-crisis period, and the post-crisis period.
The pre-crisis period is taken as January 2000 to June 2008, and the post-crisis period as
436 July 2008 to December 2015. The results of the sub-sample analysis are presented in
Tables VII and VIII.
For the pre-crisis period (Table VII), the return spillover is not significant for any of the
BRICS markets. Moreover, except for India and Brazil, the stock returns of no other country
are affected by their one-week lagged returns. Further, only the crude oil volatility spillover
is significant for all the stock markets. Gold spillover is significant only for Russia. For India
and South Africa, it is significant only at 10 percent level. The volatility asymmetry is not
significant for India, China and Russia; with only Brazil and South Africa equity markets
showing significant volatility asymmetry at 1 percent level.
The results for post-crisis period are presented in Table VIII. The volatility asymmetry
coefficient is significant and negative for all the BRICS markets, which suggests that after
the financial crisis, the volatility asymmetry has increased. The return spillover from
crude oil is significant for China, Russia and South Africa, which suggests that the

India China Russia Brazil South Africa

Crude oil 4.99 6.26 16.98 10.52 3.40

Gold 1.54 1.41 1.21 2.56 4.19
Notes: This table presents the variance shocks spillover ratios (in percent) from crude oil and gold markets to
Table VI. BRICS countries’ stock markets. Variance ratio of crude oil shocks and gold shocks are given by VRoil
Variance ratios 2 2 j;t ¼
ðj2j s2oil;t =hj;t Þ and VRgold
j;t ¼ ð|j sgold;t =hj;t Þ
(values in percent)

Parameters India China Russia Brazil South Africa

α 0.00 (2.43) 0.00 (1.27) 0.00 (1.58) 0.00 (1.53) 0.00 (0.87)
β 0.13*** (2.87) −0.05 (−1.25) 0.00 (0.08) −0.10** (−2.16) −0.04 (−1.12)
γ −0.05 (−1.39) 0.02 (0.68) 0.04 (1.10) 0.01 (0.15) 0.03 (1.00)
δ 0.06 (0.98) 0.01 (0.25) −0.10 (−1.31) −0.07 (−0.73) −0.10* (−1.85)
φ 0.21*** (4.19) 0.30*** (4.10) 0.42*** (4.61) 0.52*** (5.21) 0.59*** (11.87)
| −0.04* (−1.83) 0.02 (0.72) 0.23*** (5.24) 0.08 (1.96) 0.05* (1.69)
a1 0.30*** (2.69) 0.24*** (3.09) 0.19** (2.51) 0.02 (0.37) −0.10 (−1.24)
a2 0.90*** (15.72) 0.96*** (27.51) 0.97*** (44.98) 0.95*** (35.94) 0.73*** (9.18)
θ −0.13* (−1.90) −0.05 (−1.04) −0.00 (−0.10) −0.10*** (−2.74) −0.31*** (−5.90)
Diagnostic test on standardized residuals
Ljung-Box Q test (10) 13.52 8.07 3.42 6.87 9.28
McLeod-Li test (10) 6.65 11.18 13.40 5.65 2.35
Notes: α is the intercept, and β is the first-order autoregressive term of the mean equation for a country. γ and
δ are the lagged-return spillovers from the crude oil and gold, respectively. φ and | are the volatility spillovers
from the crude oil and gold respectively. θ is the volatility asymmetry measure, and a1 and a2 are the
Table VII. innovation and persistence parameters of the EGARCH model. Ljung-Box test and McLeod-Li test are applied
Pre-crisis spillover on the standardized residuals and squared standardized residuals, respectively. *,**,***Significant of the
test results t-statistics (given in parentheses) at 10, 5 and 1 percent levels, respectively
Parameters India China Russia Brazil South Africa
Volatility
spillover
α 0.00 (0.54) 0.00 (0.31) −0.00 (−1.40) −0.00 (−1.09) −0.00 (−0.18)
β 0.03 (0.76) −0.08* (−1.72) −0.10 (−1.97) −0.06 (−1.02) −0.10*** (−2.76)
γ 0.03 (0.79) 0.11*** (3.27) 0.18*** (3.21) 0.05 (1.18) 0.08** (2.36)
δ −0.01 (−0.20) 0.01 (0.25) −0.06 (−0.71) 0.03 (0.40) 0.05 (0.84)
φ 0.24*** (5.16) 0.27*** (8.02) 0.55*** (11.74) 0.50*** (8.38) 0.31*** (11.54)
| 0.20*** (3.16) 0.16*** (2.92) 0.31*** (4.06) 0.51*** (5.89) 0.42*** (8.17) 437
a1 0.12** (2.43) 0.18*** (3.11) 0.17* (1.65) 0.20*** (3.68) 0.19*** (4.36)
a2 0.97*** (44.53) 0.95*** (36.40) 0.97*** (43.25) 0.96*** (56.10) 0.93*** (45.02)
θ −0.05* (−1.83) −0.06* (−1.75) −0.16*** (−3.43) −0.08** (−2.22) −0.19*** (−5.53)
Diagnostic test on standardized residuals
Ljung-Box Q test (10) 14.49 11.06 15.87 21.65** 19.71**
McLeod-Li test (10) 12.22 7.65 10.41 3.45 13.74
Notes: α is the intercept, and β is the first-order autoregressive term of the mean equation for a country. γ and
δ are the lagged-return spillovers from the crude oil and gold, respectively. φ and | are the volatility spillovers
from the crude oil and gold respectively. θ is the volatility asymmetry measure, and a1 and a2 are the
innovation and persistence parameters of the EGARCH model. Ljung-Box test and McLeod-Li test are applied Table VIII.
on the standardized residuals and squared standardized residuals, respectively. *,**,***Significant of the Post-crisis spillover
t-statistics (given in parentheses) at 10, 5 and 1 percent levels, respectively test results

dependency of stock markets on crude oil has increased post-financial crisis. The volatility
spillover is significant for both crude oil and gold, which implies that after the financial
crisis, the risk perceptions implicit in crude oil and gold prices are transmitted to the stock
markets more strongly. This result, together with the high volatility asymmetry, signifies
higher sensitivity of the stock market to downside price risk, post-financial crisis. For
hedging and portfolio diversification purposes, both of these commodities may be more
effective post-crisis. For Russia, the magnitude of crude oil volatility spillover coefficient
is greater than that of the gold volatility spillover coefficient, and for South Africa, it is the
other way around. These results confirm the importance of these commodities for the
respective economies. This effect is strong enough to be significant for the full sample
(Table V ).
The diagnostic tests for all the three samples (Tables V-VIII) confirm that the EGARCH
model is correctly specified, because the Ljung-Box statistics for autocorrelation in
standardized residuals, and the Mcloed-Li statistics for squared standardized residuals are
mostly insignificant.

6. Conclusion
Crude oil is an important input for industrial activities, and gold is an important hedging
instrument against inflation and price risk of many assets. Therefore, the understanding of
volatility spillover from crude oil and gold to financial markets is relevant not only for
hedging and diversification, but also for understanding the structure of the economy.
This paper examines the volatility transmission from crude oil and gold to the BRICS stock
markets, using the EGARCH model to account for the volatility asymmetry. The study
employs data from January 2000 to December 2015 for the analysis. The study also
investigates whether the magnitude of volatility spillover has changed after the financial
crisis of 2008.
There is evidence of volatility asymmetry in the BRICS stock markets; more so, after the
financial crisis of 2008. The volatility spillovers from both the crude oil and gold are
significant and positive. The volatility of BRICS stock markets is affected by the price
volatilities of crude oil and gold. For the Russian stock market, the spillover of crude oil
JES volatility is greater than that of the gold volatility, which confirms the relative importance of
45,2 crude oil for the Russian economy. Similarly, for the South African stock market, the
spillover of gold volatility is greater than that of the crude oil volatility, which confirms
the importance of gold for the South African economy. For the other stock markets, the two
coefficients are almost equal. These results are corroborated by the fact that a higher
proportion of Russian and Brazilian stock market variance is explained by the crude oil
438 variance; whereas, the South African stock market variance is explained more by the gold
variance. These results have the obvious implications for portfolio managers and hedgers in
the BRICS markets. Given the low (positive) correlation between gold/crude oil and the
equity markets of India and China, and relatively low volatility spillover from these
commodities; the efficacy of a hedge using gold/crude oil would be limited for these markets.
For the same reasons, these commodities can be used for diversification by the portfolio
managers of these equity markets. However, the portfolio weights would need to be
frequently changed in view of volatility spillover. For the South African and Russian equity
markets, gold and crude oil (respectively) can be used more effectively for hedging the
equity market risk, in view of relatively high correlation. Here again, the hedge ratio would
need to be revised frequently, in view of the high volatility spillover from crude oil/gold to
these markets.
The financial crisis of 2008 appears to have changed the crude oil and gold volatility
spillover mechanism to the BRICS stock markets. The sub-sample analysis indicates that
during the pre-crisis period the volatility spillover only from the crude oil is significant, and
not from the gold. Since the changes in gold prices, uncorrelated to the changes in the crude
oil prices are used for estimating the volatility spillover, it is possible that only the common
factors affecting both the crude oil and gold prices are affecting the stock markets.
These factors, in turn, are incorporated in the crude oil price in our scheme of analysis (gold
price volatility having been derived from the residuals, after the effect of correlation with the
crude oil price is removed). Further, there is not much evidence of the asymmetric volatility
in the pre-crisis period. For the post-crisis period, both the volatility spillovers (from crude
oil and gold) to the stock markets are significant. This suggests that after the financial crisis
of 2008, both the crude oil and gold became important influences for the stock markets, in
their own right. The volatility asymmetry is also significant for the post-crisis sample.
These two results together signify higher sensitivity of the stock market to the downside
price risk, post-financial crisis.

References
Alotaibi, A.R. and Mishra, A.V. (2015), “Global and regional volatility spillovers to GCC stock markets”,
Economic Modelling, Vol. 45, pp. 38-49.
Arouri, M.E.H., Lahiani, A. and Nguyen, D.K. (2015), “World gold prices and stock returns in China:
insights for hedging and diversification strategies”, Economic Modelling, Vol. 44, pp. 273-282.
Baur, D.G. and McDermott, T.K. (2010), “Is gold a safe haven? International evidence”, Journal of
Banking & Finance, Vol. 34 No. 8, pp. 1886-1898.
Bekaert, G. and Harvey, C.R. (1997), “Emerging equity market volatility”, Journal of Financial
Economics, Vol. 43 No. 1, pp. 29-77.
Bollerslev, T. (1990), “Modelling the coherence in short-run nominal exchange rates: a multivariate
generalized arch model”, The Review of Economics and Statistics, Vol. 72 No. 3, pp. 498-505.
Capie, F., Mills, T.C. and Wood, G. (2005), “Gold as a hedge against the dollar”, Journal of International
Financial Markets, Institutions and Money, Vol. 15 No. 4, pp. 343-352.
Chang, C.-L., McAleer, M. and Tansuchat, R. (2013), “Conditional correlations and volatility spillovers
between crude oil and stock index returns”, The North American Journal of Economics and
Finance, Vol. 25, pp. 116-138.
Engle, R. (2002), “Dynamic conditional correlation”, Journal of Business & Economic Statistics, Vol. 20 Volatility
No. 3, pp. 339-350. spillover
Haixia, W. and Shiping, L. (2013), “Volatility spillovers in China’s crude oil, corn and fuel ethanol
markets”, Energy Policy, Vol. 62, pp. 878-886.
Hamilton, J.D. (1996), “This is what happened to the oil price-macroeconomy relationship”, Journal of
Monetary Economics, Vol. 38 No. 2, pp. 215-220.
Hassouneh, I., Serra, T., Bojnec, Š. and Gil, J.M. (2016), “Modelling price transmission and volatility 439
spillover in the Slovenian wheat market”, Applied Economics, Vol. 49 No. 41, pp. 1-11.
Hedi Arouri, M.E. and Khuong Nguyen, D. (2010), “Oil prices, stock markets and portfolio investment:
evidence from sector analysis in Europe over the last decade”, Energy Policy, Vol. 38 No. 8,
pp. 4528-4539.
Hood, M. and Malik, F. (2013), “Is gold the best hedge and a safe haven under changing stock market
volatility?”, Review of Financial Economics, Vol. 22 No. 2, pp. 47-52.
Huang, R.D., Masulis, R.W. and Stoll, H.R. (1996), “Energy shocks and financial markets”, Journal of
Futures Markets, Vol. 16 No. 1, pp. 1-27.
Jones, C.M. and Kaul, G. (1996), “Oil and the stock markets”, The Journal of Finance, Vol. 51 No. 2,
pp. 463-491.
Khalfaoui, R., Boutahar, M. and Boubaker, H. (2015), “Analyzing volatility spillovers and hedging
between oil and stock markets: evidence from wavelet analysis”, Energy Economics, Vol. 49,
pp. 540-549.
Le, T.-H. and Chang, Y. (2012), “Oil price shocks and gold returns”, International Economics, Vol. 131,
pp. 71-103.
Li, Y. and Giles, D.E. (2015), “Modelling volatility spillover effects between developed stock markets
and Asian emerging stock markets”, International Journal of Finance & Economics, Vol. 20 No. 2,
pp. 155-177.
Lin, B., Wesseh, P.K. and Appiah, M.O. (2014), “Oil price fluctuation, volatility spillover and the
Ghanaian equity market: implication for portfolio management and hedging effectiveness”,
Energy Economics, Vol. 42, pp. 172-182.
Majdoub, J. and Mansour, W. (2014), “Islamic equity market integration and volatility spillover
between emerging and US stock markets”, The North American Journal of Economics and
Finance, Vol. 29, pp. 452-470.
Melvin, M. and Sultan, J. (1990), “South African political unrest, oil prices, and the time varying risk
premium in the gold futures market”, Journal of Futures Markets, Vol. 10 No. 2, pp. 103-111.
Mensi, W., Beljid, M., Boubaker, A. and Managi, S. (2013), “Correlations and volatility spillovers across
commodity and stock markets: linking energies, food, and gold”, Economic Modelling, Vol. 32,
pp. 15-22.
Mensi, W., Hammoudeh, S., Nguyen, D.K. and Yoon, S.-M. (2014), “Dynamic spillovers among major
energy and cereal commodity prices”, Energy Economics, Vol. 43, pp. 225-243.
Nazlioglu, S., Erdem, C. and Soytas, U. (2013), “Volatility spillover between oil and agricultural
commodity markets”, Energy Economics, Vol. 36, pp. 658-665.
Ng, A. (2000), “Volatility spillover effects from Japan and the US to the Pacific-Basin”, Journal of
International Money and Finance, Vol. 19 No. 2, pp. 207-233.
Olson, E., Vivian, A.J. and Wohar, M.E. (2014), “The relationship between energy and equity markets:
evidence from volatility impulse response functions”, Energy Economics, Vol. 43, pp. 297-305.
Raza, N., Jawad Hussain Shahzad, S., Tiwari, A.K. and Shahbaz, M. (2016), “Asymmetric impact of gold,
oil prices and their volatilities on stock prices of emerging markets”, Resources Policy, Vol. 49,
pp. 290-301.
Reboredo, J.C. (2013), “Is gold a hedge or safe haven against oil price movements?”, Resources Policy,
Vol. 38 No. 2, pp. 130-137.
JES Richardson, M. and Smith, T. (1993), “A test for multivariate normality in stock returns”, The Journal of
45,2 Business, Vol. 66 No. 2, pp. 295-321.
Sadorsky, P. (1999), “Oil price shocks and stock market activity”, Energy Economics, Vol. 21 No. 5,
pp. 449-469.
Sadorsky, P. (2012), “Correlations and volatility spillovers between oil prices and the stock prices of
clean energy and technology companies”, Energy Economics, Vol. 34 No. 1, pp. 248-255.
440 Tiwari, A.K. and Sahadudheen, I. (2015), “Understanding the nexus between oil and gold”, Resources
Policy, Vol. 46 No. Part 2, pp. 85-91.
Zhang, Y.-J. and Wei, Y.-M. (2010), “The crude oil market and the gold market: evidence for
cointegration, causality and price discovery”, Resources Policy, Vol. 35 No. 3, pp. 168-177.

Further reading
Chang, C.-L., McAleer, M. and Tansuchat, R. (2010), “Analyzing and forecasting volatility spillovers,
asymmetries and hedging in major oil markets”, Energy Economics, Vol. 32 No. 6, pp. 1445-1455.
Engle, R.F. and Kroner, K.F. (1995), “Multivariate simultaneous generalized arch”, Econometric Theory,
Vol. 11 No. 1, pp. 122-150.

Corresponding author
Vikas Pandey can be contacted at: vikas-pandey@outlook.com

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com