Oil Price Shocks and Volatility in Australian Stock Returns

17 Pages Posted: 21 Jun 2013

See all articles by Ronald A. Ratti

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

M. Zahid Hasan

University of Notre Dame Australia - School of Business

Date Written: June 2013

Abstract

This paper examines the effect of oil shocks on return and volatility in the sectors of Australian stock market and finds significant effects for most sectors. For the overall market index, an increase in oil price return significantly reduces return, and an increase in oil price return volatility significantly reduces volatility. An advantage of looking at sector returns rather than a general index of stock returns is that sectors may well differ markedly in how they respond to oil price shocks. The energy and material sectors (as expected) and the financial sector (surprisingly) are out of step (in different ways) with results for the other sectors and for the overall index. A rise in oil price increases returns in the energy and material sectors and an increase in oil price return volatility increases stock return volatility in the financial sector. Explanation for the negative (positive) association between oil return (oil return volatility) and returns (volatility of returns) in the financial sector must be based on the association via lending to and/or holdings of corporate bonds issued by firms with significant exposure to oil price fluctuations and their speculative positions in oil‐related instruments.

Suggested Citation

Ratti, Ronald A. and Hasan, M. Zahid, Oil Price Shocks and Volatility in Australian Stock Returns (June 2013). Economic Record, Vol. 89, pp. 67-83, 2013, Available at SSRN: https://ssrn.com/abstract=2282952 or http://dx.doi.org/10.1111/1475-4932.12034

Ronald A. Ratti (Contact Author)

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

M. Zahid Hasan

University of Notre Dame Australia - School of Business

Australia

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