The high-frequency asymmetric response of stock returns to monetary policy for high oil price events

a r t i c l e i n f o JEL classification: E52 G10 G14 Keywords: High oil price events Asymmetric impacts of monetary shocks Financing constraints This paper investigates whether a high oil price event that worsens the quality of a firm's balance sheet in turn provides an additional transmission channel to the stock market, which then affects stock returns. We examine the asymmetric impacts of monetary shocks on stock returns across high oil price events and non-high oil price events over the period from 1995 to 2008. We ask how these impacts respond to the relative ability of firms to obtain external finance. Our findings suggest that more energy-intensive industries and durable-goods industries react more significantly to monetary shocks based on high oil price events than on those based on non-high oil price events. By controlling for the capacity for external finance, the in-traday windows reveal that a monetary surprise for the high oil price events has a bigger impact on stock returns than for the non-high oil price events. Firms with financing constraints find that the adverse impact of a surprise monetary policy action on high oil price events is amplified in the medium profitability category, while the impact of a surprise monetary policy action on non-high oil price events is amplified in the lowest profitability category. Higher oil prices cause the costs of production of goods and services to increase, and most of the previous literature therefore finds that oil price shocks have a negative impact on real GDP growth rates, and also cause higher inflation Some studies have even concluded that oil price shocks are the main cause of economic recession (Blanchard and Gali, 2008; Bohi, 1989). On the other hand, an increase in the oil price affects production activity and corporate earnings, and therefore has some implications for asset prices in financial markets. Many studies, therefore, investigate how oil price shocks influence the stock market. Most of these studies find the relationship between oil price shocks and stock returns to be significantly negative even concludes that a higher oil price can push the stock market into a bear state. However , certain other studies find evidence of oil price changes having no effect on asset returns (Al Janabi et al. find no negative relationship between stock returns and changes in the prices of oil futures. Wei (2003) concluded that the decrease in U.S. …