Abstract
This paper aims to investigate the predictability of good and bad volatilities of oil prices for stock returns. Our empirical results show that bad volatility of oil prices, rather than good volatility of oil prices, can predict stock returns after the oil financialization. Especially, bad oil volatility negatively predicts stock returns because it leads to falling economic activity and greater financial market uncertainty. Further analysis finds that the association between bad oil volatility and stock return prediction is stronger with the increase in funding constraints and financial regulation policy uncertainty in the post-financialization period. Also, the predictability of bad oil volatility for stock returns can be enhanced by the retail investor attention.
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