Transmission of oil price risk to airline stock returns: Evidence from China and the United States

Abstract

This paper focuses on analyzing the volatility spillover relationship between oil returns and the airline industries in G2 economies (China and the United States) during three major crisis events: U.S.-China trade tensions, COVID-19, and the Russia-Ukraine conflict. Using asymmetric DCC-GARCH, BEKK-GARCH, and continuous wavelet coherence analysis methods, the study examines how these crises impact the volatility between oil and airline stocks. The findings of BEKK-GARCH demonstrate that the oil market's past volatility negatively affected the Chinese airline stocks during COVID-19, with a similar effect observed for the USA during the Russian-Ukraine crisis. The optimal weights offer portfolio diversification during the recent war crises for both. Regarding hedging effectiveness, the airline industries benefit from including oil assets in their portfolios to mitigate risks. The wavelet coherence analysis shows a significant multi-waves in-phase (positive) co-movement for China. The oil-returns and China Xiamen Airline (OR-CHX) correlation is prominent during health and war crises. In the United States, except for OR-southwest Airline (SWT), the co-movement exhibited a counter-cyclical (negative) coherence at a medium scale. Based on these empirical findings, portfolio managers and policymakers should incorporate oil assets into their portfolios as a strategic measure to reduce risk.