Crude Oil Shocks and Stock Market Returns
Babatunde Olatunji Odusami
Widener University - School of Business Administration
May 1, 2008
Applied Financial Economics, Forthcoming
This article examines whether nonlinear crude oil effect observed in aggregate US stock return can be explained by unexpected shocks from the crude oil market. I separate the distribution of aggregate US stock return into variance component driven by smoothly arriving news information and discrete Poisson news arriving from the crude oil market. I find that unexpected crude oil shocks have nonlinear effect on excess US stock market return. Contemporaneous and lagged returns on crude oil futures have significant negative effect on jump distribution in US stock market returns. I also investigate if the volatility of aggregate US stock return is in any way related to information released at the Organization of Petroleum Exporting Countries (OPEC) meetings. The empirical result reveals no significant feedback effect from OPEC meetings to the US stock markets.
Number of Pages in PDF File: 31
Keywords: Jumps, diffusions, Crude Oil, Stock market return, futures
JEL Classification: G13, Q40Accepted Paper Series
Date posted: November 27, 2007 ; Last revised: November 27, 2008
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