Crude Oil Shocks and Stock Market Returns

31 Pages Posted: 27 Nov 2007 Last revised: 21 Mar 2014

See all articles by Babatunde Olatunji Odusami

Babatunde Olatunji Odusami

Widener University - School of Business Administration

Date Written: May 1, 2008

Abstract

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.

Keywords: Jumps, diffusions, Crude Oil, Stock market return, futures

JEL Classification: G13, Q40

Suggested Citation

Odusami, Babatunde Olatunji, Crude Oil Shocks and Stock Market Returns (May 1, 2008). Applied Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=944788

Babatunde Olatunji Odusami (Contact Author)

Widener University - School of Business Administration ( email )

Chester, PA 19013
United States

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