Impact of state-dependent oil price on US stock returns using local projections

ABSTRACT

In this paper, we investigate the impact of oil prices on both aggregate and industry US real stock returns over the period 1973–2017. The empirical analysis contributes to the related literature introducing a state-dependent oil price (high and low) and the local projections approach. Our main finding is that, depending on the nature of the shock and industry, the negative effects of oil price shocks become exacerbated -and the positive effects get moderated- if oil prices are already high.

KEYWORDS:

• State-dependent oil price
• U.S. stock returns
• economic policy uncertainty
• local projections

JEL CLASSIFICATION:

• G12
• Q43

Acknowledgement

We thank the editor, David Peel and an anonymous referee for helpful comments and suggestions. Juan Equiza and Fernando Perez de Gracia gratefully acknowledge financial support from the Ministerio de Economía y Competitividad (ECO2017-83187-R).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For example, recently Carcel, Gil-Alana, and Wanke (2018) investigate the monetary policy in Brazil using LPs.

² The results do not change if we include also as controls the contemporaneous value of those variables that according to our recursive assumptions cannot respond instantaneously to the specific type of shock. For instance, if we estimate the dynamic effect of an aggregate demand shock at time t on real economic activity at time t also (h = 0), we could include in $w_t$ the real price of oil at time t ($rp{o}_t)$but do not include (the change in) real oil production at the time of the shock ($\mathrm{\Delta }pro{d}_t)$.

³ The results are very similar if we do not include policy uncertainty in the system, however often they become less significant or non-significant.

⁴ Motivated by the minor role of oil supply shocks estimated by Kilian and Park (2009), Kang et al. (2016) revisit the study of their impact on US stock returns and find it mostly non-significant. Their main contribution, however, is the distinction and identification of US and non-US supply shocks. They find that reductions in US oil production reduce significantly the aggregate US stock return. Our results, thus, point at an important role of negative supply shocks of US origin during our sample period.

⁵ For oil prices in low levels, returns of automobile and retail firms are insignificantly (and counter-intuitively) benefited, but Kang and Ratti (2013) had this result.

Additional information

Funding

This work was supported by the Ministerio de Economía y Competitividad [ECO2017-83187-R].