Oil price asymmetric effects: Answering the puzzle in international stock markets☆

A b s t r a c t a r t i c l e i n f o JEL classification: C23 G15 Q43 Keywords: Asymmetric effects International stock markets Oil prices Panel data Oil price volatility Although studies have found an asymmetric pattern in the response of aggregate output to oil price changes, parallel studies in stock markets have not been conclusive about their existence. This paper finds evidence that effects for oil-importing and oil-exporting countries run in opposite directions. Oil price hikes have a negative effect on the stock markets of oil-importing countries, while the impact is positive for the stock markets of oil-exporting countries. Statistical tests support the presence of asymmetric effects only in oil-importing countries. Oil price volatility has a negative impact in stock markets of oil-importing countries and positive in oil-exporting countries. Moreover, oil volatility seems to be affected asymmetrically by oil price changes. Oil price drops increase oil volatility more than oil price hikes do. Overall, the evidence seems to support that falls in oil prices do not impact stock markets because their positive effects are offset by negative effects of oil price volatility, canceling out effects for oil-importing countries. The importance of energy costs to economic growth has motivated research to study the economic impact of oil price changes. In his pioneer work, Hamilton (1983) shows that oil price hikes accounted partially for every U.S. recession after World War II. Bernanke (1983) and Pindyck (1991) models explain that large oil price movements increase uncertainty about future prices, causing delays in business investments. Though oil price rises have negative effects on gross domestic product (GDP), strikingly, drops have not been found to stimulate aggregate output (see, for instance Mork, 1989; Mork et al., 1994), which has been commonly named in the literature as the asymmetric puzzle (see Ferderer, 1996). Stock markets are commonly seen as bellwethers of the economy have tried to find a similar asymmetric impact of oil price changes in stock markets, the evidence was mixed. One shortcoming in the previous literature is a failure to address the role of oil price volatility in stock markets. Yet oil price volatility is likely to affect asymmetry because volatility can be a transmission mechanism itself. Uncertainty in future oil costs causes companies to postpone investments (Bernanke, 1983), because firms are uncertain whether the fall in energy prices is permanent or transitory. 1 Ferderer (1996) …