Oil sensitivity and its asymmetric impact on the stock market

Yen-Hsien Lee and Jer-Shiou Chiou

Energy, 2011, vol. 36, issue 1, 168-174

Abstract: We develop a two-step methodology to facilitate an examination of the impact of oil shocks on stock returns. Oil price volatility is monitored in this study through the use of a regime-switching model, with the presence of jumps subsequently being taken into consideration to examine the asymmetric effects of oil prices on stock returns. Our analysis provides quite conclusive results based upon the use of a regime-switching model with consideration of jumps; that is, when there are significant fluctuations in oil prices (West Texas Intermediate; WTI), the resultant unexpected asymmetric price changes lead to negative impacts on S&P 500 returns. However, the same result does not hold in a regime of lower oil price fluctuations. We therefore suggest that the achievement of a well diversified portfolio should involve the consideration of oil price shocks, which, as a consequence, should also help to improve the accuracy of hedging against oil price risks.

Keywords: Asymmetric effects; ARJI model; Regime-switching (search for similar items in EconPapers)
JEL-codes: C5 G1 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (71)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:36:y:2011:i:1:p:168-174

DOI: 10.1016/j.energy.2010.10.057

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