Oil price volatility and stock price fluctuations in an emerging market: Evidence from South Korea

Rumi Masih, Sanjay Peters, Lurion De Mello

Research output: Contribution to journalArticleResearchpeer-review

Abstract

How important are oil price fluctuations and oil price volatility on equity market performance? What are the policy implications if volatility turns out to be significant? We assess this issue in an economics/finance nexus for Korea using a VEC model including interest rates, economic activity, real stock returns, real oil prices and oil price volatility. Our main aim is to capture the effects of crude oil prices on the Korean economy thoroughly covering the period of the Asian Financial Crisis of 1997, which heavily affected the country, and the oil price hikes in the early 1990s after the Gulf War. South Korea was the country most hit by the financial crisis together with Indonesia and Thailand. Results indicate the dominance of oil price volatility on real stock returns and emphasize how this has increased over time. Oil price volatility can have profound effect on the time horizon of investment and firms need adjust their risk management procedures accordingly. This increase in dependency has been found in other net oil importing emerging equity markets. We test the relationship between oil price movements and economic activity by using modern time series techniques in a cointegrating framework. We expand the standard error correction model by examining the dynamics of out of sample causality through the generalized variance decomposition and impulse response function techniques. The evidence from persistence profiles also gives important guidelines based on how fast the entire system adjusts back to equilibrium. In addition, we find the cointegrating relationship to be stable and find that the linear error correction model to be more favorable than an asymmetric 2 period Markov switching model.

LanguageEnglish
Pages975-986
Number of pages12
JournalEnergy Economics
Volume33
Issue number5
DOIs
Publication statusPublished - Sep 2011

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Error correction
Economics
South Korea
Oil price volatility
Stock prices
Oil prices
Emerging markets
Fluctuations
Oils
Finance
Risk management
Impulse response
Time series
Crude oil
Decomposition
Real stock returns
Equity markets
Economic activity
Error correction model
Oil

Cite this

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abstract = "How important are oil price fluctuations and oil price volatility on equity market performance? What are the policy implications if volatility turns out to be significant? We assess this issue in an economics/finance nexus for Korea using a VEC model including interest rates, economic activity, real stock returns, real oil prices and oil price volatility. Our main aim is to capture the effects of crude oil prices on the Korean economy thoroughly covering the period of the Asian Financial Crisis of 1997, which heavily affected the country, and the oil price hikes in the early 1990s after the Gulf War. South Korea was the country most hit by the financial crisis together with Indonesia and Thailand. Results indicate the dominance of oil price volatility on real stock returns and emphasize how this has increased over time. Oil price volatility can have profound effect on the time horizon of investment and firms need adjust their risk management procedures accordingly. This increase in dependency has been found in other net oil importing emerging equity markets. We test the relationship between oil price movements and economic activity by using modern time series techniques in a cointegrating framework. We expand the standard error correction model by examining the dynamics of out of sample causality through the generalized variance decomposition and impulse response function techniques. The evidence from persistence profiles also gives important guidelines based on how fast the entire system adjusts back to equilibrium. In addition, we find the cointegrating relationship to be stable and find that the linear error correction model to be more favorable than an asymmetric 2 period Markov switching model.",
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Oil price volatility and stock price fluctuations in an emerging market : Evidence from South Korea. / Masih, Rumi; Peters, Sanjay; De Mello, Lurion.

In: Energy Economics, Vol. 33, No. 5, 09.2011, p. 975-986.

Research output: Contribution to journalArticleResearchpeer-review

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