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

Oil price shocks and the US stock market: A nonlinear approach

Linkages between oil price shocks and stock returns revisited

This paper examines the asymmetric impact of oil price uncertainty on stock returns using monthly data covered the period July 1997 to March 2016. The measure of oil price change is the logarithmic first difference of the West Texas Intermedieate(WTI) while stock return is the logarithmic first difference of the KOSPI. Oil price uncertainty is measured by the conditional standard deviation of the one-step-ahead forecast error for the change in the oil price. A bivariate GARCH-in-mean vector autoregressive model of Elder and Serletis (2010) is used for analysis. The results show that oil price uncertainty has a positive significant impact on stock returns. That is, an increase in oil price uncertainty tends to increase stock returns. The study also finds that the responses of stock returns to positive and negative oil price shocks are asymmetric since the responses are not equal in absolute terms. The negative oil price shock appears to have a larger effect than the negative oil price shock of equal size. Furthermore, the inclusion of the contemporaneous oil price volatility term in stock return equation dampens the responses of stock returns to positive oil price shock. On the other hand, it amplifies its response to a negative oil price shock at least for the first two horizons. However, the effect is significant only in the response of stock returns to positive oil price shock. Overall, these results show that oil price uncertainty matters for stock returns in Korea.

Purpose– This study aims to examine the relationship between the oil price and the exchange rate for Nigeria between January 1997 and December 2012. Previous empirical studies revealed an ambiguous relationship between crude oil prices and exchange rates, a reason for exploring the differential effects of positive and negative oil price shocks on the exchange rate.Design/methodology/approach– Time series and structural analysis were used.Findings– The findings indicate different responses for the exchange rate with respect to positive and negative oil price shocks. Positive oil price shocks were found to depreciate the exchange rate, whereas negative oil price shocks appreciate the exchange rate. In addition, the asymmetric effects of positive and negative oil price shocks on the real exchange rate were not supported by the statistical evidences. The empirical results were robust to different specifications.Originality/value– To the best of the authors’ knowledge, this is the first paper to assess the differential impact of positive and negative oil price shocks and the role of oil prices in predicting the exchange rate over long horizons in Nigeria.

The nexus, downside risk and asset allocation between oil and Islamic stock markets: A cross-country analysis

The economy of Ghana is highly vulnerable to fluctuations in the international price of crude oil. This is due to the fact that oil as a commodity plays a central role in the economic activities of the nation. The objective of this paper is to investigate the dynamic relationship between oil price shocks and macroeconomic variables in the Ghanaian economy. This is achieved through the use of Vector Autoregressive (VAR) and Vector Error Correction (VECM) models. The variables considered in the study include: real oil price, real government expenditure, real industry value added, real imports, inflation and the real effective exchange rate. The study points out the asymmetric effects of oil price shocks; for instance, positive as well as negative oil price shocks on the macroeconomic variables used. The empirical findings of this study suggest that both linear and nonlinear oil price shocks have adverse impact on macroeconomic variables in Ghana. Positive oil price shocks are stronger than negative shocks with respect to government expenditure, inflation and the real effective exchange rate. Industry value added and imports have stronger responses to negative oil price shocks. Positive oil price shocks account for about 30% of fluctuations in government expenditure, 5% of imports, 6% of industry value added, 17% of inflation and 2% of the real effective exchange rate in the long run. Negative oil price shocks account for about 8% of fluctuations in government spending, 20% of imports, 8% of inflation and 2% of the real effective exchange rate in the long run. The data was obtained from the United States Energy Information Administration and the World Bank’s World Development Indicators.

Although a lot of empirical research has studied the relationship between changes in oil price and economic activity, it is surprising that little research has been conducted on the relationship between oil price shocks and the Greater China region (China, Hong Kong and Taiwan). Therefore, the main goal of this article is to apply detailed monthly data from 1997/7 to 2008/9 to fill this gap. Compared to the effect of US stock market returns described by Kilian (2009) and Kilian and Park (2009), we found that the impact of oil price shocks on stock prices in Greater China has been mixed. First, the impact of oil price shocks on Taiwan's stock market is very similar to that on the US stock market. Additionally, all three shocks have had significantly positive impacts on Hong Kong's stocks, partially in contrast to the effects on the US stock market. However, in contrast to the effect in the US stock market, we found that only global oil supply shock has a significantly positive impact on China's stock returns, but global oil demand shock and the oil specific demand shock have no significant impacts. The reason for the lack of significant impacts is that the positive expectation effect of China's fast economic growth may be just offset by the negative effect of a precautionary demand-driven effect. This result is also consistent with the previous empirical findings that the segmented and integrated China stock market is mixed, and it implies that the China stock market is ‘partially integrated’ with the other stock markets and oil price shocks.

The US stock market has displayed considerable excess volatility during the different waves of the COVID-19 pandemic. Notably, while most US indexes fell abruptly and lost about 20–30% during the first wave and in times of lockdowns, unlike the global financial crisis of 2008–2009, the correction was rapid, and most stock indexes subsequently exceeded their pre-COVID levels. Accordingly, it is important to assess whether this dynamic is driven more by a switch in fundamentals or whether it is simply due to a conversion of investors’ emotions. This chapter aims to analyze the dynamics of the US (S&P500) stock index, both before and during the ongoing coronavirus pandemic. Our findings point to three interesting results. First, US stock returns are driven by both macrofinancial and behavioral factors. Second, a two-regime multifactorial model reproduces the dynamics of the US market in which financial factors play a key role whatever the regime is, while the impact of behavioral factors appears more significant only in the second regime when investors’ anxiety exceeds a given threshold. Third, our in-sample forecasts point to the superiority of our nonlinear multifactorial model to forecast the dynamics of the US stock market.

How do U.S. stock returns respond differently to oil price shocks pre-crisis, within the financial crisis, and post-crisis?

US stock market regimes and oil price shocks

This article examines whether nonlinear crude oil effect observed in aggregate US stock return can be explained by unexpected shocks from the crude oil market. I separate the distribution of aggregate US stock return into variance component driven by smoothly arriving news information and discrete Poisson news arriving from the crude oil market. I find that unexpected crude oil shocks have nonlinear effect on excess US stock market return. Contemporaneous and lagged returns on crude oil futures have significant negative effect on jump distribution in US stock market returns. I also investigate if the volatility of aggregate US stock return is in any way related to information released at the Organization of Petroleum Exporting Countries (OPEC) meetings. The empirical result reveals no significant feedback effect from OPEC meetings to the US stock markets.

Explaining the time-varying effects of oil market shocks on US stock returns

The asymmetric effects of oil price shocks on the U.S. stock market

This study investigates the impact of stock price fluctuations on stock markets in six countries in Gulf Cooperation Council (Saudi Arabia, Kuwait, Oman, Bahrain, United Arab Emirates (UAE) and Qatar) during and after the recent geopolitics conflicts, known as Arab Spring, from January 2011 to December 2017. Two statistical models were implemented to measure the relationship between oil price fluctuations and stock markets returns. The logistic smooth transition model (LSTR) was implemented to measure the relationship between oil price direction (positive/negative) and stock markets returns. The exponential smooth transition model (ESTR) was applied to capture the relationship between the magnitude of oil price fluctuations (small/large) and stock markets returns. The results reveal several asymmetrical results of oil price directions (positive/negative) on stock markets returns in some GCC countries. In Saudi Arabia, Kuwait and Bahrain, the negative oil price fluctuations have larger impact on the returns of stocks markets than positive oil price fluctuations. The results reveal also that the existence of political instability increases the sensitivity of stock markets returns on negative oil price shocks. In addition, the results of ESTR model do not reveal any asymmetrical relationship between the magnitude of oil price changes and stock markets returns in GCC region except Oman. A high level of oil price shocks has larger impact on Omani stock market returns than small oil price shocks.

A threshold vector autoregression (TVAR) is estimated to study the effects of oil price shocks on Canadian output and price level. While much of the literature has investigated potential asymmetric effects of positive and negative oil price shocks, we extend the analysis to consider asymmetries associated with the business cycle phase, the size of the oil price shock, and potential correlations among them. Positive oil price shocks are found to have a stronger effect on output than negative oil price shocks. This asymmetry is significant in recessions, but lessened during expansions. The results also suggest that the reduction in inflation due to a negative oil price shock is larger than the increase in inflation following a positive oil price shock, especially during periods of low output growth. Yet, neither inflation nor output growth seems to vary disproportionately with the size of the oil price shock. In general, the results are robust to the ordering of the variables in the VAR process and to the time window over which the net oil price change is computed.