Oil-Price Uncertainty and International Stock Returns: Dissecting Quantile-Based Predictability and Spillover Effects Using More than a Century of Data

Mehmet Balcilar, Rangan Gupta and Christian Pierdzioch

No 202217, Working Papers from University of Pretoria, Department of Economics

Abstract: We investigate whether oil-price uncertainty helps in forecasting international stock returns of ten advanced and emerging countries. We consider an out-of-sample period of 1925:08 to 2021:09, with an in-sample period 1920:08-1925:07, and employ a quantile-predictiveregression approach, which is more informative relative to a linear model, as it investigates the ability of oil-price uncertainty to forecast the entire conditional distribution of stock returns, rather than only its conditional-mean. A quantile-based approach accounts for nonlinearity (including regime changes), non-normality, and outliers. Based on a recursive estimation scheme, we draw the following main conclusions: the quantile-predictiveregression approach using oil-price uncertainty as a predictor statistically outperforms the corresponding quantile-based constant-mean model for all ten countries at certain quantiles (capturing normal, bear, and bull markets), and over specific forecast horizons, compared to forecastability being detected for eight countries under the linear predictive model. Moreover, we detect forecasting gains in many more horizons (at particular quantiles) compared to the linear case. In addition, an oil-price uncertainty-based state-contingent spillover analysis reveals that the ten equity markets are tighter connected during the upper regime, suggesting that heightened oil-market volatility erodes the benefits from diversification across equity markets.

Keywords: international stock markets; oil price uncertainty; forecasting; quantile regression (search for similar items in EconPapers)
JEL-codes: C22 C53 G15 Q41 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2022-03
New Economics Papers: this item is included in nep-ban, nep-ene, nep-for and nep-rmg
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Citations: View citations in EconPapers (4)

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Journal Article: Oil-Price Uncertainty and International Stock Returns: Dissecting Quantile-Based Predictability and Spillover Effects Using More than a Century of Data (2022)
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