A study of lead–lag structure between international crude oil price and several financial markets

Complex non-linear relationship between international crude oil price and financial market has challenged the classical econometric method. This paper studies the relationships between oil price and several financial markets based on both the Copula model and the Thermal Optimal Path method. First, we investigate the tail dependence of copula function between crude oil market and financial market. The results demonstrate that there were different correlations at several time periods. In 2013 and 2014, the risk caused by oil price volatilities could be reduced by diversified investment in the U.S. and China stock markets. After 2015, the tail dependence between crude oil market and two stock markets tended to converge, and the effect of multi-national investment strategy was weakened. Furthermore, we make a comparison with two kinds of cross-correlation curves, respectively of price sequence and of return sequence. The price evolution mechanism of stock market is predicted while the stock returns in various countries are more heterogeneous. Finally, we employ the thermal optimal path method to characterize the dynamic lead–lag relationships. The lead–lag structure between oil market and the U.S. stock market has stronger signal than that between oil market and China stock market, and the return spillover effect of oil market might show diverse pattern in mature or emerging stock market. During 2000 to 2002, the U.S. stock market led oil market with a leading time about 20 weeks, and subsequently the significant lead–lag structure occurred in the mid-2008. •The risk of oil price can be reduced by diversified investment.•Tail dependence between oil markets and two stock markets tended to converge.•Stock prices have the characteristic of periodicity, while VIX, CDS do not.•Lead–lag curves based on price are more significant than on return sequences.•The spillover effect of oil market differ in mature and emerging stock market.