Oil prices & stock returns: Modeling the asymmetric effects around the zero lower bound

Abstract

This paper aims to investigate the nonlinear relationship between oil prices and stock returns around the zero lower bound. Using state-dependent local projections, we find that oil price shocks cause an increase in stock returns when the economy is operating in the zero lower bound. On the other hand, oil prices and stock returns mostly show a negative relationship when interest rates are higher. Our results are robust to the inclusion of variables that control for the state of the economy, as well as exogenous measures of oil price shocks derived following Kilian (2009) and Känzig (2021). This study, thus emphasizes the need for investors and policy makers to consider asymmetries in the impact of oil price shocks across the zero lower bound when analyzing the aggregate stock market behavior.