Ebook Asymmetric Effects of Oil Price Fluctuations in International Stock Markets
Between January 2000 and the summer of 2008, the price of oil increased almost five times, to become a cause of considerable concern. Escalating oil prices are likely to endanger the pace of worldwide economic growth as countries need sources of energy. As stock markets are commonly seen as bellwethers of an economy, (see, e.g., Fama (1990) and Schwert (1990)), oil price variations are likely be reflected in stock market returns. Yet, there is inconsistent evidence on the importance of oil prices for stock markets. Jones and Kaul (1996) provide evidence that aggregate stock market returns in the U.S., Canada, Japan and the U.K. are negatively sensitive to the adverse impact of oil price shocks on those economies. Chen et al. (1986), Ferson and Harvey (1994b) and Huang et al. (1996), however, find that oil futures returns do not have much impact on broad-based market indices such as the S&P 500 and that there is no reward for taking oil price risk in stock markets.
We provide new evidence on the way oil prices move stock markets. First, we investigate whether the impact of oil prices is asymmetric; that is whether the impact depends on the deviation being positive or negative. Although some authors demonstrate that the impact of oil price changes on the macroeconomy is asymmetric, i.e., oil price hikes have a negative impact on GDP, but drops in oil prices do not necessarily have a positive impact on output (see Mork, 1989; Mork et al., 1994), the relation has not been formally tested in stock markets.
Second, we investigate whether oil price volatility impacts international stock market returns. Third, we link asymmetries in oil price sign with oil price risk. Do soaring oil prices aggravate or diminish uncertainty about oil prices? Finally, we use quantile regressions to better analyze the role of oil price returns in extreme variations of international stock market returns.
We analyze for the first time the exposure of a large sample of stock markets to oil price fluctuations. Our results show that oil price spikes depress international stock markets, but oil prices drops do not necessarily increase stock market returns. Overall, the results provide new evidence on the asymmetric effects of oil price fluctuations. Moreover, the volatility of oil prices impacts negatively international stock market returns. Both effects apply only for stock markets of developed countries. Emerging markets returns do not show sensitivity to oil prices variations. In addition, the asymmetry of oil price changes impacts oil volatility, i.e. when oil prices soar, oil volatility also increases, while negative oil price changes dampen volatility. Finally, oil price fluctuations are a factor creating downside risk for international country investment.
Controlling for the impact of oil price fluctuations has become a prominent factor in investment decisions and consequently risk management. Our analysis should be helpful in understanding the workings of oil price variation in international country diversification. The structure of the paper is at follows. Section II describes the data and the methodology. Section III presents the results of the estimation. Section IV makes a series of robustness tests to the analysis based on quantile regressions. Section V concludes.
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