Linkages between oil price shocks and stock returns revisited

Abstract

In this paper, we revisit the debate on the relationship between oil price shocks and stock market returns by replicating the quantile-on-quantile (QQ) regression model for the US stock market in Sim and Zhou (2015, Journal of Banking and Finance), and extending it to 15 countries. The classification of these countries as oil importers or oil exporters depends on their net position in crude oil trade. Our results indicate that the main finding by Sim and Zhou (2015) that large negative oil price shocks can bolster stock returns when markets are performing well is only partially supported by the three largest oil importers in our sample-China, Japan and India-during the period 1988:1-2007:12. However, when extending the study to more recent data (period 1988:1-2016:12), we find that China and India experience higher returns when markets perform well and there is a large positive oil price shock. Also, large positive oil price shocks often lead to higher stock market returns when markets perform well for both oil exporting countries-Canada, Russia, Norway-and moderately oil dependent countries-such as Malaysia, Philippines and Thailand. In most cases large negative oil price shocks depress further already poorly performing markets, as in Sim and Zhou (2015). These findings highlight that the relationship between the distributions of oil price shocks and stock market returns is not stable over time in most countries studied.Furthermore, the asymmetric effect between positive and negative oil price shocks observed in the US market by Sim and Zhou (2015) is less evident in most countries for both the baseline and extended periods.

Special issue on replication

“…Cook and Fosten (2018) look at two "rockets and feathers" papers, confirming the findings by Bachmeier and Griffin (2003) but showing that the results of Liu et al (2010) are sensitive to specification. Filip et al (2017) confirm the weak and varying relationship between food and fuel prices, found by Zhang et al (2010), for a much wider range of indicators. Mastroeni et al (2018) revisit a number of papers on the chaotic behaviour of energy prices, confirming some earlier results but not others.…”

Analysing spillover between returns and volatility series of oil across major stock markets

“…In the context of oil prices, increase in oil prices could result in increased costs, and consequently affecting corporate profitability/shareholder value, and thus negatively affecting stock prices (Filis, Degiannakis, & Floros, 2011). The assumptions of asset pricing theory suggest that elements that have possible systematic impact on investment opportunities or consumption behaviour (e.g., oil prices), are likely to affect the pricing of large stock aggregates (Tchatoka, Masson, & Parry, 2018, p. 15). Wan (2005) presents interesting theoretical justification about the asymmetric impact of oil prices on stock returns.…”

Oil and Mortality

“…The impacts of oil price shocks on different aspects of an economy have been widely discussed in the literature (see e.g. Park and Ratti, 2008;Jimenez-Rodriguez, 2008;Farzanegan and Markwardt, 2009;Iwayemi and Fowowe, 2011;Aydın and Acar, 2011;Scholtens and Yurtsever, 2012;Cunado and de Gracia, 2014;Gao et al, 2014;Kang et al, 2014;Zhang and Qu, 2015;Tsai, 2015;Cunado et al, 2015;Ju et al, 2016;Zhang and Tu, 2016;Nusair, 2016;Zhao, 2016;Kim et al, 2017;Cross and Nguyen, 2017;Lee et al, 2017;Karnizova and Reza, 2018;Moshiri and Moghaddam, 2018;Nasir et al, 2018;Ioannidis and Ka, 2018;Oladosu et al, 2018;Lorusso and Pieroni, 2018;Tchatoka et al, 2018;Herrera et al, 2019;Lee and Lee, 2019;Nusair and Olson, 2019;Grigoli, et al, 2019;Bergmann, 2019). However, the mentioned studies are different from our paper because what they consider as oil price shocks is not a same concept as what we refer to as the 1973 oil price shock.…”