Jump dynamics and volatility: Oil and the stock markets

• Published in: Energy (Oxford) Vol. 34; no. 6; pp. 788 - 796
• Main Authors: Chiou, Jer-Shiou, Lee, Yen-Hsien
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.06.2009; Elsevier
• Subjects: Applied sciences; ARJI model; Asymmetric effects; Asymmetry; Dynamics; Economic data; Energy; Energy economics; Exact sciences and technology; Fluctuation; Fossil fuels and derived products; General, economic and professional studies; Jumps; Markets; Mathematical models; Methodology. Modelling; Oil; Raw materials; Transforms; Volatility; Asymmetric effects; Jumps; Volatility; ARJI model; Stock exchange; Cointegration; Price; Econometric model; Autoregressive model; Return rate; Economic impact; Oil economy; Modeling; Petroleum
• ISSN: 0360-5442
• DOI: 10.1016/j.energy.2009.02.011

Our study distinguishes itself from the prior studies within the oil and financial literature by not only examining the asymmetric effects of oil prices on stock returns, but also exploring the importance of structure changes in this dependency relationship. We retrieve daily data on S&P 500 and West Texas Intermediate (WTI) oil transactions covering the period from 1 January 1992 to 7 November 2006, and then transform the available data into daily returns. In contrast to the extant literature, in this study, consideration of expected, unexpected and negative unexpected oil price fluctuations is incorporated into the model of stock returns; we also focus on the ways in which oil price volatility, as opposed to general macroeconomic variables, can influence the stock market. We go on to implement the ARJI (Autoregressive Conditional Jump Intensity) model with structure changes, from which we conclude that high fluctuations in oil prices have asymmetric unexpected impacts on S&P 500 returns.