Abstract
Volatilities in the stock market are due to fluctuations in essential energy commodities. This in effect underpins the impact of short- and long-run prices on producers, consumers, portfolio managers, and policymakers. To understand the past, present, and future dynamics of energy commodities and stock market uncertainty — this paper investigated the nexus between real stock index in the US. We investigated energy commodities namely oil price, coal price, and natural gas price employing over decadal monthly data from 1991:01 to 2019:12. The study applied autoregressive distributed lag (ARDL) and dynamic simulations of ARDL (DYNARDL) techniques to investigate long-term shocks in oil price, coal price, natural gas price, short-term interest rate, and industrial production index. The study found negative long-run relationship between real oil price, real coal price, real natural gas price, short-term interest rate, and real stock index, with only industrial production index reporting a positive relationship with real stock index in both ARDL and dynamic simulated ARDL models. While we found positive relationship between energy commodities and real stock index in the short run, negative relationship was reported between short-term interest rate, industrial production index, and real stock index. Incorporating real Western Texas Intermediate oil in S&P500 stock price index function corrects historical fluctuations by 64% compared to 54% speed of adjustment with real brent oil. The dynamic ARDL simulation further provides key insight into how energy commodity prices and economic activity shocks are transmitted to stock market prices in the U.S.
Highlights
Energy commodities are one of the vital natural resources used by countries as input in many economic sectors including industry, trans portation, and among others––that ensures economic stability and en hances national security
We employed unit root tests to examine the properties of the vari ables using Phillips-Perron (PPERRON) and Augmented Dicky-Fuller (ADF) test to ascertain the order of integration and obtain robust re sults
Based on the PPERRON and ADF unit root tests, we fail to reject the null hypothesis for real oil price (ROIL), real West Texas Intermediate (WTI) oil price (RWTI), real coal price (RCOAL), real natural gas price (RNGAS), industrial production (IPI), and short-term interest rate (SHTI) at 5% significance level
Summary
Energy commodities are one of the vital natural resources used by countries as input in many economic sectors including industry, trans portation, and among others––that ensures economic stability and en hances national security. The major trading energy commodities commonly used across countries include oil, natural gas, and coal. The oil demand rose steadily in 2018 with its major consumption in the United States alongside China and India. Natural gas consumption increased by 4.6%, accounting for nearly half of the global energy consumption. The global demand for coal energy rose consistently for two years since 2018. In Asia, coal-driven electricity supply remains critical to meet the growing demand in China, Indonesia, India, south, and east Asia (IEA, 2020). Because coal and natural gas are the major sources of electricity and heating, increment in the price of energy commodities is expected to affect household cash flows. Oil is a fundamental input for industrial production, strongly affects inflation rates. Interest rate is one of the important monetary policies in the economy––directly increasing the cost of capital, consumer purchasing power, and savings
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