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Does Indian Stock Market Provide Diversification Benefits Against Oil Price Shocks? A Sectoral Analysis

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  • Ali, Mohsin
  • Masih, Mansur

Abstract

This paper investigates the time-varying relationship between the oil price and disaggregated stock market of India using DCC-MGARCH and Continuous Wavelet Transformation methodologies. Our findings reveal the evolving relationship between the oil price and disaggregated stock market. The correlations are generally volatile before the 2007-08 crisis but since then the correlations are positive implying no diversification benefits for the investors during rising oil prices. Since, emerging markets in general, and India in particular, is expected to increase its share of oil consumption in the world’s energy market (due to rapid expansion), therefore for the stock market to grow, especially the oil-intensive industries, we recommend the government should increase its reliance on alternative energy resources such as coal and renewables. Furthermore, as rising oil prices can also have its adverse effect through exchange rate channel, we suggest the monetary policies should be time varying to manage the oil inflationary pressures arising out of extreme volatility in the oil prices.

Suggested Citation

  • Ali, Mohsin & Masih, Mansur, 2014. "Does Indian Stock Market Provide Diversification Benefits Against Oil Price Shocks? A Sectoral Analysis," MPRA Paper 58828, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:58828
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    Cited by:

    1. Tiwari, Aviral Kumar & Jena, Sangram Keshari & Mitra, Amarnath & Yoon, Seong-Min, 2018. "Impact of oil price risk on sectoral equity markets: Implications on portfolio management," Energy Economics, Elsevier, vol. 72(C), pages 120-134.
    2. Aviral Kumar Tiwari & Sangram Keshari Jena & Satish Kumar & Erik Hille, 2022. "Is oil price risk systemic to sectoral equity markets of an oil importing country? Evidence from a dependence-switching copula delta CoVaR approach," Annals of Operations Research, Springer, vol. 315(1), pages 429-461, August.

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    More about this item

    Keywords

    DCC-GARCH; CWT; Disaggregated stock market; India; Oil price shocks; Diversification;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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