Non-linear effects of oil shocks on stock prices
Ahmed Pirzada () and
Konstantinos Theodoridis ()
No 865, Working Papers from Queen Mary University of London, School of Economics and Finance
This paper uses a panel Threshold VAR model to estimate the regime-dependent impact of oil shocks on stock prices. We find that an adverse oil supply shock has a negative effect on stock prices when oil inflation is low. In contrast, this impact is negligible in the regime characterised by higher oil price inflation. Using a simple DSGE model, we suggest that the explanation for this result may be tied to the behaviour of credit spreads. When oil inflation is low, lower policy rates encourage firms to get highly leveraged. A negative oil shock in this scenario leads to a substantial increase in spreads, reducing profits and equity prices. In contrast, at higher rates of inflation, spreads are less affected by the oil shock, ameliorating the impact on the stock market.
Keywords: Threshold VAR; Hierarchical Prior; DSGE model; Oil shocks (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:865
Access Statistics for this paper
More papers in Working Papers from Queen Mary University of London, School of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Nicholas Owen ( this e-mail address is bad, please contact ).