The Impact of Crude Oil Price Returns on the Stock Index Returns A Case study: Tehran Stock Exchange & Istanbul Stock Exchange

Abstract

This study aims to investigate the relationship between crude oil price returns and stock market index returns of an exporter (Iran) and an importer (Turkey). Using daily data of West Texas Intermediate (WTI), Brent crude oil spot prices, and one-four month futures prices for the WTI; Tehran Stock Exchange Price Index (TEPIX), Tehran Stock Exchange Dividend and Price Index (TEDPIX), the Dividend and Price Index for the Istanbul Stock Exchange gathered during the period of 2000-2010; the relationship is analyzed by two models of the Constant Conditional Correlation (CCC) and the Dynamic Conditional Correlation (DCC). The findings reveal that the DCC is predominant over the CCC for Turkey, which means there is a non-constant conditional correlation. In contrast, the findings show the predominance of CCC for Iran. Among the spot markets, stock market volatility is better defined by the Brent than the WTI. For futures markets of the WTI, a better relationship with longer maturity confirms the financial markets as being long-term. Finally, no evidence is found for one- or bi-directional volatility spillovers (interdependencies) between the markets.