Oil prices, US stock return, and the dependence between their quantiles

Abstract

In this article, we examine the relationship between oil prices and US equities by proposing a novel quantile-on-quantile (QQ) approach to construct estimates of the effect that the quantiles of oil price shocks have on the quantiles of the US stock return. This approach captures the dependence between the distributions of oil price shocks and the US stock return and uncovers two nuance features in the oil–stock relationship. First, large, negative oil price shocks (i.e. low oil price shock quantiles) can affect US equities positively when the US market is performing well (i.e. at high US return quantiles). Second, while negative oil price shocks could affect the US stock market, the influence of positive oil price shocks is weak, which suggests that the relationship between oil prices on the US equities is asymmetric.