VOLATILITY SPILLOVER ANALYSIS IN THE GLOBAL CRUDE OIL MARKET

Abstract

Adopting four primary crude oil benchmarks and using data spanning from 1982 to 2022 sourced from central Bank of Nigeria (CBN) statistical bulletin, this research used the Multivariate GARCH, to analyze the effects of the returns, and volatility spillovers and also assessed how the association between benchmark crude oil prices evolves and holds up across time. Since crude oil benchmark factors such as mean, time-varying covariance, and spillover volatility are interdependent, it was consequently necessary to use a multivariate GARCH Model to assess the advantages of this dependency. Particularly, the diagonal BEKK model was deployed along with the constant conditional correlation. The findings demonstrated from the diagonal BEKK model that historical conditional volatility and squared errors had substantial impact on the conditional variances of the four mean returns for crude oil benchmarks. The result from the conditional covariances demonstrated significant effects of cross products of earlier error terms and preceding covariance terms. The research validated the substantial volatility co-movements and spillover across crude oil markets. The sufficiency tests showed that the model was adequate. the study concluded that the volatility of the crude oil markets exhibited strong linkages and bilateral volatility transmission from one market to the other. Also, the constant conditional correlation of the DCC-GARCH showed that there was no disparity between correlation of the expected returns of the Average, Brent, Dubai, and West Texas intermediate raw price and it’s return. The portmanteau test and the QQ plot test showed that the diagonal BEKK-GARCH model was sufficient. The study recommended that the central bank should prioritize price stabilization to avoid petro-aggression. Also, the government should enhance its system for recognizing volatility spillover effects between Average, Brent, Dubai, and WTI Crude Oil returns enhance the early warning system for crude oil price crises and to reduce price volatility.