Trading around the clock: Revisit volatility spillover between crude oil and equity markets in different trading sessions

• Published date: 01 June 2023
• Author: Jing Hao,Feng He,Feng Ma,Tong Fu
• Date: 01 June 2023
• DOI: http://doi.org/10.1002/fut.22410

Received: 17 December 2021

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Accepted: 3 March 2023

DOI: 10.1002/fut.22410

RESEARCH ARTICLE

Trading around the clock: Revisit volatility spillover

between crude oil and equity markets in different

trading sessions

Jing Hao

1

|Feng He

2

|Feng Ma

3

|Tong Fu

4

1

School of Management and Engineering, Capital University of Economics and Business, Beijing, China

2

School of Finance, Capital University of Economics and Business, Beijing, China

3

School of Economics and Management, Southwest Jiaotong University, Chengdu, China

4

School of Economics, Guizhou University, Guiyang, China

Correspondence

Feng He, School of Finance, Capital

University of Economics and Business,

Beijing, China.

Email: feng_ac@163.com

Tong Fu, School of Economics, Guiyang,

Guizhou University, China.

Email: canjianft@hotmail.com

Funding information

National Natural Science Foundation of

China, Grant/Award Numbers: 72141304,

72001156; Capital University of Economics

and Business Research Fund (Fund for

Fundamental Research Expenses of

Beijing Municipal Universities)

Abstract

We investigate the volatility spillover between the crude oil (West Texas

Intermediate) and G7 countries' equity markets with high‐frequency data.

Considering the trading period difference among different countries, the

volatility spillover of oil market intraday and overnight sessions is studied with

G7 countries, respectively. The empirical findings suggest that the US stock

market dominates intraday volatility spillover to the oil market, while the

European and Asian stock markets dominate overnight spillovers. The

asymmetric spillover result shows that stock markets mainly spillover bad

volatility to the oil market in the intraday trading session, and spillover good

volatility to the oil market in the overnight trading session. Our results provide

empirical evidence that crude oil market overnight trading information is also

important for understanding information diffusion and volatility forecasting.

KEYWORDS

asymmetric spillover, crude oil, overnight trading, volatility spillover

1|INTRODUCTION

Being the most vital energy source in the world, crude oil has a significant impact on the economy (Bachmeier, 2008).

Much research has been conducted on the relationship between the oil market and other economic indicators, such as

inflation, unemployment, and real economic growth (Chen & Chen, 2007; Hassan et al., 2019; Liu et al., 2020; Ren

et al., 2023). Many academic studies have been carried out on the development of the oil market and its correlation and

spillover effect on other financial markets, such as the equity market (Asteriou & Bashmakova, 2013; Salisu &

Oloko, 2015), futures market (Dahl et al., 2019), and foreign exchange market (Brayek et al., 2015), among which the

spillover between the equity market and oil market has attracted the most research attention, as oil market trading

affects portfolio selection, risk management, and international asset allocation (Zhu et al., 2014).

The financial market does not trade around the clock. When the equity market is closed, no trading data are available in

that market. Therefore, it is normally assumed that overnight information could be reflected rapidly in asset prices when the

new trading day starts (Ahoniemi et al., 2015), and the overnight return is calculated based on the difference between the

J Futures Markets. 2023;43:771–791. wileyonlinelibrary.com/journal/fut © 2023 Wiley Periodicals LLC.

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771

closing price on the previous day and the opening price on the following day. While overnight information is important to

study asset price volatility (Tsiakas, 2008;Wangetal.,2022), it is proved that the traditional method of using only one squared

overnight return is not sufficient to capture overnight price dynamics (Lee et al., 2022;Lyócsa&Todorova,2020). Therefore, a

new proxy is required to study the overnight information flow in the financial market.

The 23‐h traded light crude oil futures offer us a good opportunity to calculate overnight volatility with continuous

trading information during the nighttime and further explore intraday and overnight volatility spillover effects on

international asset prices. The development of electronic trading platforms enabled the globalization of oil futures

trading. Benefitting from online trading systems, oil can be traded nearly 23 h a day by investors from all over the

world.

1

Normally, we cannot expect most US investors to trade during nonworking periods; thus, most overnight

trading may come from outside the United States. In this case, studying the volatility spillover characteristics between

oil and international stock markets requires the consideration of trading time differences. From Figure 1, we can

observe that many trades occur during the overnight period in the United States.

Although abundant research has examined the interaction between the crude oil market and the equity market worldwide,

it has not yet obtained consistent conclusions. Some studies find that increased oil prices will decrease stock market returns,

both for the aggregate and sectoral stock markets (Asteriou & Bashmakova, 2013;Jones&Kaul,1996); others believe that it is

positive (Fang & You, 2014;Park&Ratti,2008); and some studies document that there is no statistically significant effect

(Alsalman, 2016;Huangetal.,1996). Research has also focused on the correlatio n and spillover effect between stock markets

and crude oil markets. Zhu et al. (2011)demonstratedtheexistenceofabidirectionallong‐run Granger‐causal relation between

crude oil and stock markets for 14 Organisation for Economic Co‐operation and Development (OECD) and non‐OECD

countries; Ma et al. (2014) find that the cross‐correlations between the crude oil market and the six Gulf Cooperation Council

(GCC) stock markets are all significant; Salisu and Oloko (2015) empirical result suggests a significant positive return spil lover

from the US stock market to the oil market and bidirectional shock spillovers between the two markets; Ding et al. (2016)

considered the causal relationships between West Texas Intermediate (WTI) and Dubai crude oil returns and five stock index

returns (S&P 500, Nikkei, Hang Seng, Shanghai, and Korea Composite Stock Price Index) and find that Nikkei and Hang Seng

Granger‐cause WTI returns, and all stock index returns Granger‐cause Dubai crude oil returns except for Shanghai returns.

FIGURE 1 Intraday and overnight trading volume of crude oil futures. This figure shows the hourly total trading volume of West Texas

Intermediate oil futures.

1

Chicago Mercantile Exchange (CME), as the largest futures market in the world, announced a total proportion of 99% of online trading. In February

2015, CME announced to shut down the over‐the‐counter market, which took action in July 2015. From September 18, 2015, CME reduced the online

trading time by 15 min, from 18:00 to 17:00 next day.

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HAO ET AL.