Role of oil shocks in US stock market volatility: A new insight from GARCH-MIDAS perspective

Abstract

For both local and foreign investors, the equity market and oil price shocks have massive repercussions. In this research, we examine the essential role of the oil shock in predicting the U.S. stock market volatility. The oil shock measures include NPI (net price increase), ANP (asymmetric net prices change), SNP (symmetric net price change), LPI (large price increase), and NPI2 (net price increase) indicators. We select the GARCH-MIDAS model to estimate the volatility. The study provides several notable outcomes. First, in all five oil shocks, symmetric net price change (SNP) information is more useful for forecasting the volatility of the U.S. stock market. Further, we find some evidence for the net price increase (NPI) and asymmetric net price change information (ANP) in some estimation windows. Also, the Covid-19 epidemic provides proof. Our results are robust in the alternative valuation methods, MCS (model confidence set) test, and alternative estimation windows.