Explaining the nonlinear response of stock markets to oil price shocks

Authors

Diego Escobari, The University of Texas Rio Grande ValleyFollow
Shahil Sharma

Document Type

Article

Publication Date

12-15-2020

Abstract

This paper is set to reconcile the existent conflicting empirical evidence on the effect of oil prices on stock prices. We estimate various nonlinear models where the response changes according to a first-order Markov switching process. More importantly, we model the transition probabilities between the high- and low-response regimes to depend on state variables to allow us to explain the forces behind the asymmetry in the response. The results show statistically significant asymmetries that can be explained by economic recessions and to a lower extent depend on the magnitude of the oil price shift and on whether the shift is positive or negative. In the high response regime, the effect is positive and lasts longer. We also find evidence of asymmetries in the response of stock prices to crude oil supply shocks, global aggregate demand shocks, and oil-specific demand shocks.

Comments

(C) 2020 Elsevier Ltd. All rights reserved. Original published version available at doi.org/10.1016/j.energy.2020.118778

Recommended Citation

Escobari, D., & Sharma, S. (2020). Explaining the nonlinear response of stock markets to oil price shocks. Energy, 213, 118778. https://doi.org/10.1016/j.energy.2020.118778

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Publication Title

Energy

DOI

10.1016/j.energy.2020.118778