Connectedness between oil price shocks and US sector returns: Evidence from TVP-VAR and wavelet decomposition

This paper examines the dynamic return and volatility connectedness between oil price shocks (demand, supply, and risk shocks) and US sector returns from October 2001 to January 2022. For this purpose, we combine the decomposition of the time series in time scales through the wavelet approach with the application of the TVP-VAR model proposed by Antonakakis et al. (2020). Our results show the high dynamic connectedness between markets and allow the identification of the role of all sector indices (except Communication Services, Utilities and Real Estate) and risk shocks as net contributors of shocks to the system, whereas demand and supply shocks are net receivers of spillovers. We further explore and document from a portfolio performance perspective the benefits of diversified portfolios comprised of all consider sector indices that include assets linked to the calculation of oil price shocks according to Ready (2018). •Examines the impact of oil price shocks on US sector returns and finds high dynamic linkages.•Combines wavelet decomposition and TVP-VAR model for robust analysis.•Finds that most sector indices and risk shocks are net contributors to systemic shocks.•Shows that demand and supply shocks act as net receivers in the financial system.•Examines the performance of diversified portfolios with sector indices and “oil” assets.