The effects of oil prices on equity market returns in BRICS grouping: A quantile-on-quantile approach

Mabanga, Chris and Bonga-Bonga, Lumengo (2020): The effects of oil prices on equity market returns in BRICS grouping: A quantile-on-quantile approach.

Abstract

This study assesses the effects of the magnitude of oil price shocks i.e. large negative, positive and moderate oil price shocks on equity market returns in BRICS countries during different market circumstances by making use of quantile-on-quantile regression. The current study differs from studies that employ quantile-on-quantile in assessing the relationship between oil price shocks and equity returns in different aspects. Firstly, the study intends to assess how this relationship differs per countries given their factor endowment (i.e. whether they export or import oil) within the BRICS grouping. Secondly, we also differ from Sim Zhou (2015) and Tchatoka et al. (2018) because we introduce the supply shocks by following the same structure as Kilian and Park (2009) but changing the Cholesky decomposition by ordering real oil price first, assuming the contemporaneous response of global production to oil price. The results of the empirical analysis show that distinction should be made between the demand-driven and supply-driven oil price shocks and that the outcome of this relationship depends on whether a country is a net importer or exporter of crude oil. For most of the net oil-importing countries, the low oil price demand shocks, which translate to lower oil prices, further stimulate equity markets when they are at peak. And for oil-producing countries in general, high demand oil price shocks provide an incentive for the expansion of equity markets during bad market conditions.

• Item Type: MPRA Paper
• Language: English
• Keywords: equity returns, oil price shocks, quantile-on-quantile
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C21 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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