Oil Price Shocks and Stock Return Volatility: New Evidence Based on Volatility Impulse Response Analysis

14 Pages Posted: 3 Oct 2018 Last revised: 21 Feb 2019

See all articles by Sercan Eraslan

Sercan Eraslan

Deutsche Bundesbank

Faek Menla Ali

Brunel University London

Date Written: 2018

Abstract

We use volatility impulse response analysis estimated from the bivariate GARCH-BEKK model to quantify the size and the persistence of different types of oil price shocks on stock return volatility and the covariance between oil price changes and stock returns for a wide range of net oil-importing and oil-exporting countries. We find that precautionary demand followed by aggregate demand-side shocks, compared to supply-side ones, have higher positive and persistent effects on the conditional variances of stock returns for all countries. Moreover, we show that precautionary demand shocks, unlike the other types of shocks, mostly affect the covariances between oil price changes and stock returns; their effects being negative for all countries except China, Norway and Russia, where they are positive.

Keywords: Oil price shocks, Stock returns, Volatility impulse response analysis

JEL Classification: C32, Q43

Suggested Citation

Eraslan, Sercan and Menla Ali, Faek, Oil Price Shocks and Stock Return Volatility: New Evidence Based on Volatility Impulse Response Analysis (2018). Deutsche Bundesbank Discussion Paper No. 38/2018, Available at SSRN: https://ssrn.com/abstract=3259737

Sercan Eraslan (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Faek Menla Ali

Brunel University London ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

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