Asymmetric Effect of Oil Price Shocks on Stock Markets

In this study, we investigate the relationship between stock market price and crude oil market price using Multivariate GARCH type model. We use daily frequency data of stock price indices S&P500 and NASDAQ composite and the prices of one major Crude Oil products, defined as the US price of West Texas Intermediate Cushing (WTI). Our findings provide strong evidence of asymmetries for both NASDAQ and S&P500 price indices; stock market prices rise faster, than they fall, as a reaction to changes in oil prices, after controlling for volatility and price dynamics in a multivariate GARCH context. In other words, adjustment in mean equations is faster in the presence of positive shocks. In addition, we find that volatility shocks are quite persistent and they will have long memory. This study distinguishes itself from the previous studies within the oil and financial literature by not only examining the asymmetric effects of oil prices on stock returns but also applying multivariate GARCH approach in this literature, whilst others use univariate GARCH structure.