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A sectoral analysis of asymmetric nexus between oil and stock

Afees Salisu, Ibrahim Raheem () and Umar Ndako

No 33, Working Papers from Centre for Econometric and Allied Research, University of Ibadan

Abstract: This paper revisits the stock-oil price nexus. The extant literature has shown that the nexus can be situated around the multifactor asset pricing models to accentuate the role of oil price risks in stock valuation but with mixed findings. However, attempts to improve on previous studies in this pursuit led researchers to account for nonlinearities in the relationship to assess the asymmetric response of stock prices to positive and negative oil price changes. Consequently, we fit a predictive model for stock price that accounts for asymmetry on the basis of the predictive power of oil price shocks. Innovatively, we advance arguments for considering the importance of persistence, endogeneity and conditional heteroscedasticity inherent in the relationship and the data generating process for the in-sample and out-of-sample forecasting of US sectoral stock prices. Our results emphasise the role of oil price shocks and its asymmetric impacts in the in-sample predictability model of the sectoral stock prices. This evidence is also consistent for out-of-sample forecast evaluation and robust to changes in the measure of oil prices.

Keywords: Sectoral stock prices; Oil Prices; The U.S. Asymmetry; Persistence; endogeneity and conditional heteroscedasticity (search for similar items in EconPapers)
Pages: 36 pages
Date: 2017-10
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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