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Do oil price changes contain useful predictive information about the U.S. bear stock market?

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  • Lee, Wei-Ming
  • Wu, Shue-Jen

Abstract

This paper investigates the predictive power of κ-month oil price changes (characterizing oil market trends) for the U.S. bear stock market. We find from both in-sample and out-of-sample evaluations that κ-month oil price changes with κ>12 can strongly predict the bear stock market, but conventional oil predictors fail to have predictive power. In particular, a higher current oil price relative to its level κ months ago will induce a higher probability of bear stock market in the future and the 48-month oil price change performs best at most of the forecast horizons considered. These results are robust to different subsamples, oil price series, estimation schemes for out-of-sample analysis, and phases of the business cycle. Moreover, the information provided by the 48-month oil price change covers that of inflation rate and does not completely overlap with that provided (individually or jointly) by non-oil predictors so that forecast improvement can be achieved by taking it into account.

Suggested Citation

  • Lee, Wei-Ming & Wu, Shue-Jen, 2025. "Do oil price changes contain useful predictive information about the U.S. bear stock market?," The North American Journal of Economics and Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:ecofin:v:80:y:2025:i:c:s1062940825001044
    DOI: 10.1016/j.najef.2025.102464
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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