The Dynamics of Cross-Boundary Fire - Financial Contagion between the Oil and Stock Markets

Abstract

Motivated by the complex dynamics between the oil and stock markets, this study develops a dynamic Markov regime switching-copula-extreme value theory model to quantitatively investigate financial contagion and its characteristics between these two markets. The proposed model is applied to daily returns on crude oil prices and the stock markets in the United States and China over six major extreme downside risk events. We find that financial contagion is shorter, stronger, and more susceptible to extreme downside shocks in the United States than in China. In addition, the COVID-19 crisis shows the largest financial contagion compared with previous crises.