Advertisement

Oil shocks and volatility jumps

  • Konstantinos GkillasEmail author
  • Rangan Gupta
  • Mark E. Wohar
Original Research
  • 22 Downloads

Abstract

In this paper, we analyse the role of oil price shocks, derived from expectations of consumers, economists, financial market, and policymakers, in predicting volatility jumps in the S&P500 over the monthly period of 1988:01–2015:02, with the jumps having been computed based on daily data over the same period. Standard linear Granger causality tests fail to detect any evidence of oil shocks causing volatility jumps. But given strong evidence of nonlinearity and structural breaks between jumps and oil shocks, we next employed a nonparametric causality-in-quantiles test, as the linear model is misspecified. Using this data-driven robust approach, we were able to detect overwhelming evidence of oil shocks predicting volatility jumps in the S&P500 over its entire conditional distribution, with the strongest effect observed at the lowest considered conditional quantile. Interestingly, the predictive ability of the four oil shocks on volatility jumps is found to be both qualitatively and quantitatively similar.

Keywords

S&P500 Volatility jumps Oil shocks 

JEL Classification

C22 G10 Q02 

Notes

References

  1. Alsalman AM, Herrera Z (2015) Oil price shocks and the U.S. stock market: do sign and size matter? Energy J 36:171–189.  https://doi.org/10.5547/01956574.36.3.7 Google Scholar
  2. Andersen TG, Dobrev D, Schaumburg E (2012) Jump-robust volatility estimation using nearest neighbor truncation. J Econ 169:75–93.  https://doi.org/10.1016/j.jeconom.2012.01.011 CrossRefGoogle Scholar
  3. Andersen TG, Fusari N, Todorov V (2015) The risk premia embedded in index options. J Financ Econ 117:558–584.  https://doi.org/10.1016/j.jfineco.2015.06.005 CrossRefGoogle Scholar
  4. Baek J, Seo J-Y (2015) A study on unobserved structural innovations of oil price: evidence from global stock, bond, foreign exchange, and energy markets. Rev Pac Basin Financ Mark Polic 18:1550004.  https://doi.org/10.1142/S0219091515500046 CrossRefGoogle Scholar
  5. Bai J, Perron P (2003) Computation and analysis of multiple structural change models. J Appl Econ 18:1–22.  https://doi.org/10.1002/jae.659 CrossRefGoogle Scholar
  6. Baker SR, Bloom N, Davis S (2015) What triggers stock market jumps? In: Work in progress presented at the January 2015 ASSA meetingsGoogle Scholar
  7. Baumeister C, Kilian L (2016) Forty years of oil price fluctuations: why the price of oil may still surprise us. J Econ Perspect 30:139–160.  https://doi.org/10.1257/jep.30.1.139 CrossRefGoogle Scholar
  8. Bekaert G, Hoerova M (2014) The VIX, the variance premium and stock market volatility. J Econ 183:181–190.  https://doi.org/10.1016/j.jeconom.2014.05.008 CrossRefGoogle Scholar
  9. Ben Sita B (2018) Crude oil and gasoline volatility risk into a realized-EGARCH model. Rev Quantit Finance Account.  https://doi.org/10.1007/s11156-018-0763-0 Google Scholar
  10. Bollerslev T, Todorov V, Li SZ (2013) Jump tails, extreme dependencies, and the distribution of stock returns. J Econ 172:307–324.  https://doi.org/10.1016/j.jeconom.2012.08.014 CrossRefGoogle Scholar
  11. Boudoukh J, Feldman R, Kogan S, Richardson M (2015) News and stock prices: new insights. Working paper. https://www.dropbox.com/s/oagtni23qcqmaqb/Appendix-PartI20150222.pdf?dl=0
  12. Broadie M, Chernov M, Johannes M (2007) Model specification and risk premia: evidence from futures options. J Finance 62:1453–1490.  https://doi.org/10.1111/j.1540-6261.2007.01241.x CrossRefGoogle Scholar
  13. Broock WA, Scheinkman JA, Dechert WD, LeBaron B (1996) A test for independence based on the correlation dimension. Econ Rev 15:197–235.  https://doi.org/10.1080/07474939608800353 CrossRefGoogle Scholar
  14. Caporin M, Rossi E, De Magistris PS (2015) Volatility jumps and their economic determinants. J Financ Econ 14:29–80.  https://doi.org/10.1093/jjfinec/nbu028 Google Scholar
  15. Cartwright PA, Riabko N (2018) Do spot food commodity and oil prices predict futures prices? Rev Quant Financ Account 1:1–42.  https://doi.org/10.1007/s11156-018-0746-1 Google Scholar
  16. Chang J-R, Hung M-W, Lee C-F, Lu H-M (2007) The jump behavior of foreign exchange market: analysis of Thai Baht. Rev Pac Basin Financ Mark Polic 10:265–288.  https://doi.org/10.1142/S0219091507001069 CrossRefGoogle Scholar
  17. Corsi F, Pirino D, Renò R (2010) Threshold bipower variation and the impact of jumps on volatility forecasting. J Econ 159:276–288.  https://doi.org/10.1016/j.jeconom.2010.07.008 CrossRefGoogle Scholar
  18. Cutler DM, Poterba JM, Summers LH (1989) What moves stock prices? J Portf Manag 15:4–12.  https://doi.org/10.3905/jpm.1989.409212 CrossRefGoogle Scholar
  19. Degiannakis S, George F, Vipin A (2018) Oil prices and stock markets: a review of the theory and empirical evidence. Energy J 39(5):85–131Google Scholar
  20. Diks C, Panchenko V (2005) A note on the Hiemstra-Jones test for granger non-causality. Stud Nonlinear Dyn Econ.  https://doi.org/10.2202/1558-3708.1234 Google Scholar
  21. Diks C, Panchenko V (2006) A new statistic and practical guidelines for nonparametric Granger causality testing. J Econ Dyn Control 30:1647–1669.  https://doi.org/10.1016/j.jedc.2005.08.008 CrossRefGoogle Scholar
  22. Ding Z, Liu Z, Zhang Y, Long R (2017) The contagion effect of international crude oil price fluctuations on Chinese stock market investor sentiment. Appl Energy 187:27–36.  https://doi.org/10.1016/j.apenergy.2016.11.037 CrossRefGoogle Scholar
  23. Du D, Zhao X (2017) Financial investor sentiment and the boom/bust in oil prices during 2003–2008. Rev Quant Finance Account 48:331–361.  https://doi.org/10.1007/s11156-016-0553-5 CrossRefGoogle Scholar
  24. Duffie D, Pan J, Singleton K (2000) transform analysis and asset pricing for affine jump-diffusions. Econometrica 68:1343–1376.  https://doi.org/10.1111/1468-0262.00164 CrossRefGoogle Scholar
  25. Duong D, Swanson NR (2015) Empirical evidence on the importance of aggregation, asymmetry, and jumps for volatility prediction. J Econ 187:606–621.  https://doi.org/10.1016/j.jeconom.2015.02.042 CrossRefGoogle Scholar
  26. Eraker B, Johannes M, Polson N (2003) the impact of jumps in volatility and returns. J Finance 58:1269–1300.  https://doi.org/10.1111/1540-6261.00566 CrossRefGoogle Scholar
  27. Filis G, Chatziantoniou I (2014) Financial and monetary policy responses to oil price shocks: evidence from oil-importing and oil-exporting countries. Rev Quant Finance Account 42:709–729.  https://doi.org/10.1007/s11156-013-0359-7 CrossRefGoogle Scholar
  28. Giot P, Laurent S, Petitjean M (2010) Trading activity, realized volatility and jumps. J Empir Finance 17:168–175.  https://doi.org/10.1016/j.jempfin.2009.07.001 CrossRefGoogle Scholar
  29. Gkillas K, Gupta R, Wohar ME (2018) Volatility jumps: the role of geopolitical risks. Finance Res Lett.  https://doi.org/10.1016/j.frl.2018.03.014 Google Scholar
  30. Gupta R, Wohar M (2017) Forecasting oil and stock returns with a Qual VAR using over 150 years off data. Energy Econ 62:181–186.  https://doi.org/10.1016/j.eneco.2017.01.001 CrossRefGoogle Scholar
  31. Hamilton JD (2008) Understanding crude oil prices. Natl Bur Econ Res.  https://doi.org/10.3386/w14492 Google Scholar
  32. Hamilton JD, Wu JC (2014) Risk premia in crude oil futures prices. J Int Money Finance 42:9–37.  https://doi.org/10.1016/j.jimonfin.2013.08.003 CrossRefGoogle Scholar
  33. Han H, Linton O, Oka T, Whang YJ (2016) The cross-quantilogram: measuring quantile dependence and testing directional predictability between time series. J Econ 193:251–270.  https://doi.org/10.1016/j.jeconom.2016.03.001 CrossRefGoogle Scholar
  34. Hiemstra C, Jones JD (1994) Testing for linear and nonlinear granger causality in the stock price-volume relation. J Finance 49:1639–1664.  https://doi.org/10.1111/j.1540-6261.1994.tb04776.x Google Scholar
  35. Jeong K, Härdle WK, Song S (2012) A consistent nonparametric test for causality in quantile. Econ Theory 28:861–887.  https://doi.org/10.1017/S0266466611000685 CrossRefGoogle Scholar
  36. Jiménez-Rodríguez R (2015) Oil price shocks and stock markets: testing for non-linearity. Empir Econ 48:1079–1102.  https://doi.org/10.1007/s00181-014-0832-8 CrossRefGoogle Scholar
  37. Kang W, Wang J (2018) Oil shocks, policy uncertainty and earnings surprises. Rev Quant Finance Account 51:375–388.  https://doi.org/10.1007/s11156-017-0674-5 CrossRefGoogle Scholar
  38. Kilian L, Park C (2009) The impact of oil price shocks on the U.S. stock market. Int Econ Rev 50:1267–1287.  https://doi.org/10.1111/j.1468-2354.2009.00568.x CrossRefGoogle Scholar
  39. Li H, Paraco R (2018) Impact of oil price on australian stock market returns. Rev Pac Basin Finance Mark Polic 21:1850018.  https://doi.org/10.1142/S0219091518500182 CrossRefGoogle Scholar
  40. Li Q, Racine J (2004) Cross-validated local linear nonparametric regression. Stat Sin 14:485–512.  https://doi.org/10.2307/24307205 Google Scholar
  41. Li J, Zinna G (2018) The variance risk premium: components, term structures, and stock return predictability. J Bus Econ Stat 36:411–425.  https://doi.org/10.1080/07350015.2016.1191502 CrossRefGoogle Scholar
  42. Lin CH, Lin SK, Wu AC (2015) Foreign exchange option pricing in the currency cycle with jump risks. Rev Quant Finance Account 44:755–789.  https://doi.org/10.1007/s11156-013-0425-1 CrossRefGoogle Scholar
  43. Malliaris AG, Malliaris M (2013) Are oil, gold and the euro inter-related? Time series and neural network analysis. Rev Quant Finance Account 40:1–14.  https://doi.org/10.1007/s11156-011-0265-9 CrossRefGoogle Scholar
  44. Mohanty SK, Nandha M (2011) oil shocks and equity returns: an empirical analysis of the US transportation sector. Rev Pac Basin Finance Mark Polic 14:101–128.  https://doi.org/10.1142/S0219091511002159 CrossRefGoogle Scholar
  45. Mohanty SK, Akhigbe A, Al-Khyal TA, Bugshan T (2013) Oil and stock market activity when prices go up and down: the case of the oil and gas industry. Rev Quant Finance Account 41:253–272.  https://doi.org/10.1007/s11156-012-0309-9 CrossRefGoogle Scholar
  46. Mohanty SK, Onochie J, Alshehri AF (2018) Asymmetric effects of oil shocks on stock market returns in Saudi Arabia: evidence from industry level analysis. Rev Quant Finance Account 51:595–619.  https://doi.org/10.1007/s11156-017-0682-5 CrossRefGoogle Scholar
  47. Mozumder S, Sorwar G, Dowd K (2013) Option pricing under non-normality: a comparative analysis. Rev Quant Finance Account 40:273–292.  https://doi.org/10.1007/s11156-011-0271-y CrossRefGoogle Scholar
  48. Nandha M, Brooks R (2009) Oil prices and transport sector returns: an international analysis. Rev Quant Finance Account 33:393–409.  https://doi.org/10.1007/s11156-009-0120-4 CrossRefGoogle Scholar
  49. Narayan PK, Gupta R (2015) Has oil price predicted stock returns for over a century? Energy Econ 48:18–23.  https://doi.org/10.1016/J.ENECO.2014.11.018 CrossRefGoogle Scholar
  50. Poon S-H, Granger CWJ (2003) Forecasting volatility in financial markets: a review. J Econ Lit 41:478–539.  https://doi.org/10.1257/002205103765762743 CrossRefGoogle Scholar
  51. Psychoyios D, Dotsis G, Markellos RN (2010) A jump diffusion model for VIX volatility options and futures. Rev Quant Finance Account 35:245–269.  https://doi.org/10.1007/s11156-009-0153-8 CrossRefGoogle Scholar
  52. Racine J, Li Q (2004) Nonparametric estimation of regression functions with both categorical and continuous data. J Econ 119:99–130.  https://doi.org/10.1016/S0304-4076(03)00157-X CrossRefGoogle Scholar
  53. Santa-Clara P, Yan S (2010) Crashes, volatility, and the equity premium: lessons from S&P 500 options. Rev Econ Stat 92:435–451.  https://doi.org/10.1162/rest.2010.11549 CrossRefGoogle Scholar
  54. Sariannidis N, Giannarakis G, Zafeiriou E, Billias I (2016) The effect of crude oil price moments on socially responsible firms in Eurozone. Int J Energy Econ Policy 6:356–363Google Scholar
  55. Shahzad SJH, Bouri E, Raza N, Roubaud D (2018) Asymmetric impacts of disaggregated oil price shocks on uncertainties and investor sentiment. Rev Quant Finance Account.  https://doi.org/10.1007/s11156-018-0730-9 Google Scholar
  56. Smyth R, Narayan PK (2018) What do we know about oil prices and stock returns? Int Rev Finance Anal 57:148–156.  https://doi.org/10.1016/j.irfa.2018.03.010 CrossRefGoogle Scholar
  57. Todorov V, Tauchen G (2011) Volatility jumps. J Bus Econ Stat 29:356–371.  https://doi.org/10.1198/jbes.2010.08342 CrossRefGoogle Scholar
  58. Wang J, Ngene G (2018) Symmetric and asymmetric nonlinear causalities between oil prices and the U.S. economic sectors. Rev Quant Finance Account 51:199–218.  https://doi.org/10.1007/s11156-017-0668-3 CrossRefGoogle Scholar
  59. Wu L (2003) Jumps and dynamic asset allocation. Rev Quant Finance Account 20:207–243.  https://doi.org/10.1023/A:1023699711805 CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of Business AdministrationUniversity of PatrasPatrasGreece
  2. 2.Department of EconomicsUniversity of PretoriaPretoriaSouth Africa
  3. 3.College of Business AdministrationUniversity of Nebraska at OmahaOmahaUSA
  4. 4.School of Business and EconomicsLoughborough UniversityLoughboroughUK

Personalised recommendations