Explaining the nonlinear response of stock markets to oil price shocks

Diego Escobari and Shahil Sharma

Energy, 2020, vol. 213, issue C

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.

Keywords: Asymmetric effects; Recession; Stock; Oil shocks; Regime-switching (search for similar items in EconPapers)
JEL-codes: C32 E32 G10 Q41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:213:y:2020:i:c:s0360544220318855

DOI: 10.1016/j.energy.2020.118778

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