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Good oil volatility, bad oil volatility, and stock return predictability

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  • Xiao, Jihong
  • Wang, Yudong

Abstract

This paper aims to investigate the predictability of good and bad volatilities of oil prices for stock returns. Our empirical results show that bad volatility of oil prices, rather than good volatility of oil prices, can predict stock returns after the oil financialization. Especially, bad oil volatility negatively predicts stock returns because it leads to falling economic activity and greater financial market uncertainty. Further analysis finds that the association between bad oil volatility and stock return prediction is stronger with the increase in funding constraints and financial regulation policy uncertainty in the post-financialization period. Also, the predictability of bad oil volatility for stock returns can be enhanced by the retail investor attention.

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  • Xiao, Jihong & Wang, Yudong, 2022. "Good oil volatility, bad oil volatility, and stock return predictability," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 953-966.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:953-966
    DOI: 10.1016/j.iref.2022.03.013
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    Cited by:

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    3. Chen, Wang & Chevallier, Julien & Wang, Jiqian & Zhong, Juandan, 2022. "Stock market return predictability revisited: Evidence from a new index constructing the oil market," Finance Research Letters, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    Oil market volatility; Stock return predictability; Good volatility; Bad volatility; Oil financialization;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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