A sectoral analysis of asymmetric nexus between oil price and stock returns

This paper revisits the oil-stock nexus by examining the predictability of daily sectoral stock returns on the basis of asymmetric oil prices. Consequently, we fit a predictive model for sectoral stock returns that accounts for positive and negative changes in oil price. Innovatively, we advance arguments for considering some salient features of the predictor such as persistence and conditional heteroscedasticity effects in addition to any potential endogeneity bias in the predictive model. The results suggest that the response of sectoral stock returns to oil price is asymmetric and heterogenous. Also, the asymmetric model outperforms the symmetric variant as well as time series models for virtually all the considered sectors. However, a closer examination of the predictability during tranquil and turbulent times on the basis of the global financial crisis suggests that the significance of the asymmetric model over time series models seems to have diminished during turbulent times. These findings are robust to alternative measures of oil price.