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Does crude oil price play an important role in explaining stock return behavior?

Kuang-Liang Chang and Shih-Ti Yu

Energy Economics, 2013, vol. 39, issue C, 159-168

Abstract: Employing the MS-ARJI-GJR-GARCH-X model, in which the parameters for the jump process, the asymmetric GARCH effect and the impacts of oil price shocks are regime-dependent, this paper analyzes the impact of crude oil price shock on stock return dynamics. Empirical results reveal three interesting findings. First, incorporating the asymmetric GARCH effect and the oil price shock can substantially improve fitting ability. Second, the GARCH and jump components show very different behaviors during turbulent and stable periods. Third, the effects of current and past oil price shocks differ. The conditional mean, mean of jump size and variance of jump size immediately respond to a current oil price shock. A one-period lagged oil price shock, no matter whether positive or negative, can affect the transition probability that the stock market will remain conditional in the next period. Moreover, the effects of lagged positive and negative shocks on transition probabilities are very different.

Keywords: Oil price shock; Stock return; Jump process; Regime switching (search for similar items in EconPapers)
JEL-codes: C22 C52 G12 Q43 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.eneco.2013.05.008

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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