Oil shocks and state-level stock market volatility of the United States: a GARCH-MIDAS approach

Afees Salisu, Rangan Gupta, Oguzhan Cepni and Petre Caraiani

Review of Quantitative Finance and Accounting, 2024, vol. 63, issue 4, No 11, 1473-1510

Abstract: Abstract In this paper, we employ the generalized autoregressive conditional heteroscedasticity-mixed data sampling (GARCH-MIDAS) framework to forecast the daily volatility of state-level stock returns in the United States (US) based on structurally decomposed four monthly oil shocks associated with oil supply, global economic activity, oil consumption and oil inventory. We find that over the daily period of (February) 1994 to (December) 2022 and various forecast horizons, in 46 out of the 50 states, the GARCH-MIDAS model with at least one oil shock can outperform the benchmark, i.e., the GARCH-MIDAS-Realized Volatility (RV), with 24 states depicting the importance of all the four shocks. In general, oil market-specific shocks, whether supply or demand, tend to matter more than a global economic impact driving the oil market in forecasting volatility of regional stock returns across with better forecasting performances related to states with higher CO2 emissions based on underlying energy consumption data. Our findings have important implications for investors and policymakers, with the observations for the former group depicted by an analysis of economic significance, i.e., utility gains.

Keywords: Monthly Structural Oil Shocks; Daily State-Level Stock Returns Volatility; GARCH-MIDAS; Forecasting (search for similar items in EconPapers)
JEL-codes: C32 C53 G10 Q02 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-024-01295-z Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Oil Shocks and State-Level Stock Market Volatility of the United States: A GARCH-MIDAS Approach (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:63:y:2024:i:4:d:10.1007_s11156-024-01295-z

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-024-01295-z

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().