How Does Stock Market Volatility React to Oil Shocks?

35 Pages Posted: 17 Jan 2015

See all articles by Andrea Bastianin

Andrea Bastianin

University of Milan; Fondazione Eni Enrico Mattei

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS); Fondazione Eni Enrico Mattei (FEEM), Milan, Italy

Date Written: January 15, 2015

Abstract

We study the impact of oil price shocks on U.S. stock market volatility. We derive three different structural oil shock variables (i.e. aggregate demand, oil-supply, and oil-demand shocks) and relate them to stock market volatility, using bivariate structural VAR models, one for each oil price shock. Identification is achieved by assuming that the price of crude oil reacts to stock market volatility only with delay. This implies that innovations to the price of crude oil are not strictly exogenous, but predetermined with respect to the stock market. We show that volatility responds significantly to oil price shocks caused by sudden changes in aggregate and oil-specific demand, while the impact of supply-side shocks is negligible.

Keywords: Volatility, Oil Shocks, Oil Price, Stock Prices, Structural VAR

JEL Classification: C32, C58, E44, Q41, Q43

Suggested Citation

Bastianin, Andrea and Manera, Matteo, How Does Stock Market Volatility React to Oil Shocks? (January 15, 2015). FEEM Working Paper No. 110.2014, Available at SSRN: https://ssrn.com/abstract=2550719 or http://dx.doi.org/10.2139/ssrn.2550719

Andrea Bastianin (Contact Author)

University of Milan ( email )

Via Conservatorio, 7
Milan, 20122
Italy

HOME PAGE: http://https://www.unimi.it/it/ugov/person/andrea-bastianin

Fondazione Eni Enrico Mattei ( email )

C.so Magenta 63
Milano, 20123
Italy

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS) ( email )

Via Bicocca degli Arcimboldi, 8
Milan, 20126
Italy
+39 02 6448 5819 (Phone)
+39 02 6448 5878 (Fax)

HOME PAGE: http://www.matteomanera.it

Fondazione Eni Enrico Mattei (FEEM), Milan, Italy ( email )

Corso Magenta, 63
Milan, 20123
Italy
+39 02 520 36944 (Phone)

HOME PAGE: http://www.feem.it

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