Oil price shocks and the US stock market: A nonlinear approach |
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| Affiliation: | 1. Research Institute of Economics and Management (RIEM), Southwestern University of Finance and Economics (SWUFE), 55 Guanghua Cun Jie, Chengdu, Sichuan 6100074, China;2. Surrey Energy Economics Centre (SEEC), Faculty of Economics Business and Law, University of Surrey, UK;3. Department of Accounting, Finance and Economics, University of Bournemouth, The Executive Business Centre, 89 Holdenhurst Road, Bournemouth BH8 8EB, UK;1. Faculty of Business, Al-Ahliyya Amman University, Jordan;2. Division of Accounting and Finance, University of Stirling, UK;1. Department of Economics, Shiraz University, Shiraz, Iran;2. Department of Economics, Ferdowsi University of Mashhad, Mashhad, Iran;1. College of Business, Central South University, Changsha, Hunan 410083, China;2. Supply Chain and Logistics Optimization Research Centre, Faculty of Engineering, University of Windsor, Windsor, ON, Canada;1. School of Economics, Jiangxi University of Finance and Economics, China;2. School of Software Technology, Shanxi University, China;1. University of Milan, Italy;2. Fondazione Eni Enrico Mattei, Milan, Italy;3. EfeLab, University of Milan, Italy;4. University of Milan-Bicocca, Italy;5. Ipag Business School, Paris, France |
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| Abstract: | ![]()
We study the response of US stock market returns to oil price shocks and to what extent it behaves asymmetrically over the different phases of the business cycle. For this purpose, we decompose the oil price changes into supply and demand shocks in the oil market and assess the state-dependent dynamics of structural shocks on US stock returns using a smooth transition vector autoregression model. When nonlinearity is considered, quantitatively very different asymmetric dynamics are observed. Our findings show that the responses of US stock returns to disaggregated shocks are asymmetric over the business cycle and that the impact of demand-driven shocks on US stock returns is stronger and more persistent, especially when economic activity is depressed. Furthermore, the contribution of shocks to expectation-driven precautionary demand in recessions accounts for a larger share of the variability of US stock market returns than that predicted by standard linear vector autoregressions. |
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| Keywords: | Oil price shocks Stock returns Smooth transition vector autoregression Asymmetric dynamics |
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