Oil Price Shocks and the Connectedness of US State-Level Financial Markets

Onur Polat (), Juncal Cunado (), Oguzhan Cepni and Rangan Gupta
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Onur Polat: Department of Public Finance, Bilecik Seyh Edebali University, Bilecik, Turkiye
Juncal Cunado: University of Navarra, School of Economics, Edificio Amigos, E-31080, Pamplona, Spain

No 202438, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper investigates the impact of oil supply, demand, and risk shocks on U.S. state-level stock and bond returns, utilizing daily data from February 1994 to March 2024. It examines the individual effects of oil price shocks on each state’s stock and bond returns and explores how fluctuations in oil prices influence the interdependence between state-level stock and bond markets. The findings reveal that oil demand shocks have a significant positive impact, while oil supply shocks have a significant negative impact on state-level stock returns. Although state-level bond returns also react to these supply and demand shocks, their response is statistically less significant than that of stock returns, indicating that cross-asset diversification is possible during periods of oil supply and demand shocks. However, both stock and bond returns are significantly and negatively affected by oil risk shocks, which implies limited opportunities for cross-asset diversification when oil price fluctuations are driven by risk factors. Additionally, the interdependence between U.S. equity and bond markets is more significantly influenced by oil risk shocks than by supply or demand shocks, suggesting an increase in the interconnectedness of stock and bond returns following an oil risk shock. Further analysis, using a reverse-MIDAS model to relate high-frequency connectedness measures to monthly oil price shocks, indicates that oil supply shocks positively and significantly impact stock market connectedness, while oil inventory demand shocks negatively affect bond market connectedness. Implications of our findings are discussed.

Keywords: Oil price shocks; state-level stock market returns; state-level municipal bond returns; connectedness. (search for similar items in EconPapers)
JEL-codes: C22 C32 G10 Q41 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2024-09
New Economics Papers: this item is included in nep-ene, nep-fmk and nep-ifn
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Journal Article: Oil price shocks and the connectedness of US state-level financial markets (2025)
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