The Impact of Oil Price Shocks on the Stock Market Return and Volatility Relationship

39 Pages Posted: 12 Nov 2014 Last revised: 13 Nov 2014

See all articles by Wensheng Kang

Wensheng Kang

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

Kyung Hwan Yoon

Western Sydney University - Department of Economics & Finance

Date Written: November 1, 2014

Abstract

This paper examines the impact of structural oil price shocks on the covariance of U.S. stock market return and stock market volatility. We construct from daily data on return and volatility the covariance of return and volatility at monthly frequency. The measures of daily volatility are realized-volatility at high frequency (normalized squared return), conditional-volatility recovered from a stochastic volatility model, and implied-volatility deduced from options prices. Positive shocks to aggregate demand and to oil-market specific demand are associated with negative effects on the covariance of return and volatility. Oil supply disruptions are associated with positive effects on the covariance of return and volatility. The spillover index between the structural oil price shocks and covariance of stock return and volatility is large and highly statistically significant.

Keywords: Stock return and volatility, oil price shocks, stock volatility, structural VAR

JEL Classification: E44, G10, Q41, Q43

Suggested Citation

Kang, Wensheng and Ratti, Ronald A. and Yoon, Kyung Hwan, The Impact of Oil Price Shocks on the Stock Market Return and Volatility Relationship (November 1, 2014). Available at SSRN: https://ssrn.com/abstract=2522667 or http://dx.doi.org/10.2139/ssrn.2522667

Ronald A. Ratti (Contact Author)

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

Sydney, NSW 1797
Australia

Kyung Hwan Yoon

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

Sydney, NSW 1797
Australia

No contact information is available for Wensheng Kang

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