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Oil shocks and stock return volatility

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  • Bachmeier, Lance J.
  • Nadimi, Soheil R.

Abstract

Asset return volatility is important to the macroeconomy. This paper asks whether oil price volatility can be used as a predictor of stock return volatility. In contrast with previous research, we focus on the out-of-sample predictive power of oil price volatility rather than on in-sample inference. Formal tests of out-of-sample predictive ability find no evidence supporting the use of oil price volatility as a predictor of future stock return volatility. Further analysis using rolling window estimation and structural break tests shows that the coefficients of this relationship are very unstable. The coefficients can be positive, negative, or close to zero depending on the sample that is chosen. We discuss the implications of this finding for monetary policy.

Suggested Citation

  • Bachmeier, Lance J. & Nadimi, Soheil R., 2018. "Oil shocks and stock return volatility," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 1-9.
  • Handle: RePEc:eee:quaeco:v:68:y:2018:i:c:p:1-9
    DOI: 10.1016/j.qref.2018.01.001
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    References listed on IDEAS

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    More about this item

    Keywords

    G17; Q41; Oil price; Stock return; Volatility; Prediction;

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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