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Oil Price Shocks and Volatility in Australian Stock Returns ‎

Ratti, Ronald A. and Hasan, M. Zahid (2013): Oil Price Shocks and Volatility in Australian Stock Returns ‎.

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Abstract

This paper examines the effect of oil shocks on return and volatility in the sectors of ‎Australian stock market and finds significant effects for most sectors. For the overall market ‎index, an increase in oil price return significantly reduces return, and an increase in oil price ‎return volatility significantly reduces volatility. An advantage of looking at sector returns ‎rather than a general index of stock returns is that sectors may well differ markedly in how ‎they respond to oil price shocks. The energy and material sectors (as expected) and the ‎financial sector (surprisingly) are out of step (in different ways) with results for the other ‎sectors and for the overall index. A rise in oil price increases returns in the energy and material ‎sectors and an increase in oil price return volatility increases stock return volatility in the ‎financial sector. Explanation for the negative (positive) association between oil return (oil ‎return volatility) and returns (volatility of returns) in the financial sector must be based on the ‎association via lending to and/or holdings of corporate bonds issued by firms with significant ‎exposure to oil price fluctuations and their speculative positions in oil related instruments. ‎

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