The relationship between the European stock market and the crude oil depends on the significance of the different industries in the European economy. The literature points to a structural change after the 2008 crisis without getting into details of which sectors lead this regime switch. The co-movement between oil prices and stock market is known to exhibit (1) non-linearity, (2) asymmetric tail dependence and (3) variation over time. I combine a copula approach with Switching Markov models to capture this complex linkage while the CoVaR measure translates the consequences of the tail dependence into potential losses. The results indicate a change in the lower tail dependence from negative to positive association between oil and Eurostoxx, meaning a shift in the exposure of our stock portfolio to commodity risk. There is a structural change in dependence after the 2008 financial crisis led by energy-intensive sector, e.g. basic materials and consumer goods. The economic cycle and its implications for profit margin and oil demand might explain this switch. Healthcare sector responds to oil shocks in an opposite way than Eurostoxx, displaying useful features to reduce the exposure of the stock portfolio to oil spillovers.

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This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

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