Sectoral Stock Return Sensitivity to Oil Price Changes: A Double-Threshold FIGARCH Model

Quantitative Finance, 2013, Vol. 13, No. 4, 593–612

Fox School of Business Research Paper

Posted: 18 Jun 2014

See all articles by Elyas Elyasiani

Elyas Elyasiani

Temple University - Department of Finance

Iqbal Mansur

Widener University - School of Business Administration

Babatunde Olatunji Odusami

Widener University - School of Business Administration

Date Written: July 12, 2011

Abstract

We investigate the association between the stock return distributions of 10 major U.S. sectors and oil returns within a double-threshold FIGARCH model. This model nests GARCH, IGARCH and Fama-French specifications as its special cases and allows a test of their validity. This model also has the advantage of capturing not only the short-run dynamics (as in the standard GARCH model), but also the long-run persistence pattern of oil shock effects that may decay at a slower hyperbolic pace. We find that: (i) data reject the more restricted GARCH, IGARCH and Fama-French models in favor of FIGARCH, (ii) oil return is a significant determinant of every sector’s return and/or return volatility, (iii) oil effects are asymmetric for oil returns above and below the thresholds, (iv) asymmetry is stronger when oil return volatility is greater, (v) volatilities of sectoral returns exhibit threshold-based regime shifts, and (vi) oil shock effects follow a hyperbolic, rather than an exponential decay pattern, establishing long-term persistence of shocks. Policy implications are drawn.

Keywords: Oil price, Sector returns, Threshold, FIGARCH

JEL Classification: G1, G12

Suggested Citation

Elyasiani, Elyas and Mansur, Iqbal and Odusami, Babatunde Olatunji, Sectoral Stock Return Sensitivity to Oil Price Changes: A Double-Threshold FIGARCH Model (July 12, 2011). Quantitative Finance, 2013, Vol. 13, No. 4, 593–612; Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2451274

Elyas Elyasiani (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-5881 (Phone)
215-204-5698 (Fax)

Iqbal Mansur

Widener University - School of Business Administration ( email )

3800 Vartan Way
PO Box 69381
Harrisburg, PA 17106-9381
United States

Babatunde Olatunji Odusami

Widener University - School of Business Administration ( email )

Chester, PA 19013
United States

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