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HOW DOES STOCK MARKET VOLATILITY REACT TO OIL PRICE SHOCKS?

Published online by Cambridge University Press:  16 January 2017

Andrea Bastianin  and
Matteo Manera
Andrea Bastianin*
Affiliation:
University of Milan and Fondazione Eni Enrico Mattei
Matteo Manera
Affiliation:
University of Milan-Bicocca and Fondazione Eni Enrico Mattei
*
Address correspondence to: Andrea Bastianin, Department of Economics, Management and Quantitative Methods (DEMM), University of Milan, Via Conservatorio 7, I-20122 Milan, Italy; e-mail: andrea.bastianin@unimi.it.
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Abstract

We study the impact of oil price shocks on the U.S. stock market volatility. We jointly analyze three different structural oil market shocks (i.e., aggregate demand, oil supply, and oil-specific demand shocks) and stock market volatility using a structural vector autoregressive model. Identification is achieved by assuming that the price of crude oil reacts to stock market volatility only with delay. This implies that innovations to the price of crude oil are not strictly exogenous, but predetermined with respect to the stock market. We show that volatility responds significantly to oil price shocks caused by unexpected changes in aggregate and oil-specific demand, whereas the impact of supply-side shocks is negligible.

Keywords

Realized VolatilityOil Price ShocksOil PriceStock PricesStructural VAR
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 3: Dynamics of Oil and Commodities Prices , April 2018 , pp. 666 - 682
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

We are grateful to two anonymous referees and Apostolos Serletis for insightful comments and suggestions. We also thank the participants of the International Workshop on “Oil and Commodity Price Dynamics” held at the Fondazione Eni Enrico Mattei (FEEM), Milan, 5–6 June 2014; the “8th International Conference on Computational and Financial Econometrics” held at the University of Pisa, 6–8 December 2014; the Conference on “Energy Markets” held at the IFP School-IFP Energies Nouvelles, Rueil-Malmaison, 17 December 2014; and the “3rd International Symposium on Energy and Financial Issues (ISEFI 2015)” held at the IPAG Business School, Paris, 20 March 2015. The first author gratefully acknowledges financial support from the Italian Ministry of Education, Universities and Research (MIUR) research program titled “Climate change in the Mediterranean area: scenarios, economic impacts, mitigation policies and technological innovation” (PRIN 2010-2011, prot. no. 2010S2LHSE-001).

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