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Oil price shocks and volatility do predict stock market regimes

Stavros Degiannakis, Timotheos Angelidis and George Filis

No 170, Working Papers from Bank of Greece

Abstract: The paper investigates whether oil price shocks and oil price volatility provide predictive information for the state of the US stock market returns and volatility. The disaggregation of oil price shocks according to their origin allows us to assess whether they contain incremental forecasting power on the state of the stock market returns and volatility, a case that does not hold for the oil price returns. Overall, the results suggest that oil price returns and volatility possess the power to forecast the state of stock market returns and volatility. The full effects of oil price returns, though, can only be revealed when the oil price shocks are disentangled and as such we claim that the oil price shocks have an incremental power in forecasting the state of the stock market. The findings are important for stock market forecasters and investors dealing with stock and derivatives markets.

Keywords: Decomposition of shocks; oil price shocks; oil price volatility; regime switching; stock market volatility; US stock market (search for similar items in EconPapers)
JEL-codes: C13 C32 C58 G10 Q40 (search for similar items in EconPapers)
Pages: 22
Date: 2013-12
New Economics Papers: this item is included in nep-ene and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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