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A sectoral analysis of asymmetric nexus between oil and stock

Author

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  • Afees A. Salisu

    () (Centre for Econometric and Allied Research, University of Ibadan)

  • Ibrahim D. Raheem

    (School of Economics, University of Kent, Canterbury, UK)

  • Umar B. Ndako

    () (Monetary Policy Department, Central Bank of Nigeria, Nigeria.)

Abstract

This paper revisits the stock-oil price nexus. The extant literature has shown that the nexus can be situated around the multifactor asset pricing models to accentuate the role of oil price risks in stock valuation but with mixed findings. However, attempts to improve on previous studies in this pursuit led researchers to account for nonlinearities in the relationship to assess the asymmetric response of stock prices to positive and negative oil price changes. Consequently, we fit a predictive model for stock price that accounts for asymmetry on the basis of the predictive power of oil price shocks. Innovatively, we advance arguments for considering the importance of persistence, endogeneity and conditional heteroscedasticity inherent in the relationship and the data generating process for the in-sample and out-of-sample forecasting of US sectoral stock prices. Our results emphasise the role of oil price shocks and its asymmetric impacts in the in-sample predictability model of the sectoral stock prices. This evidence is also consistent for out-of-sample forecast evaluation and robust to changes in the measure of oil prices.

Suggested Citation

  • Afees A. Salisu & Ibrahim D. Raheem & Umar B. Ndako, 2017. "A sectoral analysis of asymmetric nexus between oil and stock," Working Papers 033, Centre for Econometric and Allied Research, University of Ibadan.
  • Handle: RePEc:cui:wpaper:0033
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    References listed on IDEAS

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    1. Daniel Ştefan Armeanu & Camelia Cătălina Joldeş & Ştefan Cristian Gherghina, 2019. "On the Linkage between the Energy Market and Stock Returns: Evidence from Romania," Energies, MDPI, Open Access Journal, vol. 12(8), pages 1-21, April.

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    Keywords

    Sectoral stock prices; Oil Prices; The U.S. Asymmetry; Persistence; endogeneity and conditional heteroscedasticity;
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