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Oil prices & stock returns: Modeling the asymmetric effects around the zero lower bound

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  • Sardar, Naafey
  • Sharma, Shahil

Abstract

This paper aims to investigate the nonlinear relationship between oil prices and stock returns around the zero lower bound. Using state-dependent local projections, we find that oil price shocks cause an increase in stock returns when the economy is operating in the zero lower bound. On the other hand, oil prices and stock returns mostly show a negative relationship when interest rates are higher. Our results are robust to the inclusion of variables that control for the state of the economy, as well as exogenous measures of oil price shocks derived following Kilian (2009) and Känzig (2021). This study, thus emphasizes the need for investors and policy makers to consider asymmetries in the impact of oil price shocks across the zero lower bound when analyzing the aggregate stock market behavior.

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  • Sardar, Naafey & Sharma, Shahil, 2022. "Oil prices & stock returns: Modeling the asymmetric effects around the zero lower bound," Energy Economics, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:eneeco:v:107:y:2022:i:c:s0140988322000056
    DOI: 10.1016/j.eneco.2022.105814
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    Cited by:

    1. Liu, Feng & Xu, Jie & Ai, Chunrong, 2023. "Heterogeneous impacts of oil prices on China's stock market: Based on a new decomposition method," Energy, Elsevier, vol. 268(C).
    2. Salah A. Nusair & Jamal A. Al-Khasawneh, 2023. "Changes in oil price and economic policy uncertainty and the G7 stock returns: evidence from asymmetric quantile regression analysis," Economic Change and Restructuring, Springer, vol. 56(3), pages 1849-1893, June.
    3. Rehman, Mobeen Ur & Nautiyal, Neeraj & Vo, Xuan Vinh & Ghardallou, Wafa & Kang, Sang Hoon, 2023. "Is the impact of oil shocks more pronounced during extreme market conditions?," Resources Policy, Elsevier, vol. 85(PA).
    4. Naafey Sardar & Zulfiqar Hyder, 2022. "Does the source of the oil price shock matter for inflation in Pakistan: Implications for monetary policy," SBP Working Paper Series 110, State Bank of Pakistan, Research Department.
    5. Haykir, Ozkan & Yagli, Ibrahim & Aktekin Gok, Emine Dilara & Budak, Hilal, 2022. "Oil price explosivity and stock return: Do sector and firm size matter?," Resources Policy, Elsevier, vol. 78(C).

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    More about this item

    Keywords

    Asymmetric response; Zero lower bound; Oil price shocks; Stock returns;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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