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Linkages Between Oil Price Shocks and Stock Returns Revisited

Firmin Doko Tchatoka (), Virginie Masson () and Sean Parry ()
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Sean Parry: School of Economics, University of Adelaide

No 2018-01, School of Economics Working Papers from University of Adelaide, School of Economics

Abstract: In this paper, we revisit the debate on the relationship between oil price shocks and stock market returns by replicating the quantile-on-quantile (QQ) regression model for the US stock market in Sim and Zhou (2015, Journal of Banking and Finance), and extending it to 15 countries. The classification of these countries as oil importers or oil exporters depends on their net position in crude oil trade. Our results indicate that the finding by Sim and Zhou (2015) that large negative oil price shocks can bolster stock returns when markets are performing well is only partially supported by the three largest oil importers in our sample-China, Japan and India-during the period 1988:1-2007:12. However, when extending the study to more recent data (period 1988:1-2016:12), we find that China and India experience higher returns when markets perform well and there is a large positive oil price shock. Also, large positive oil price shocks often lead to higher stock market returns when markets perform well for both oil exporting countries-Canada, Russia, Norway-and moderately oil dependent countries-such as Malaysia, Philippines and Thailand. These findings highlight that the relationship between the distributions of oil price shocks and stock market returns is not stable over time in most countries studied. Furthermore, the asymmetric effect of oil price shocks observed in the US market by Sim and Zhou (2015) is less evident in most countries for both the baseline and extended periods.

Keywords: Oil prices; stock returns; Quantile regression (search for similar items in EconPapers)
JEL-codes: C01 C14 C31 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cis, nep-ene, nep-knm and nep-sea
Date: 2018-01
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