OIL PRICE SHOCKS AND STOCK MARKET VOLATILITY: EVIDENCE FROM EUROPEAN DATA
Stavros Degiannakis
Bank of Greece
George Filis
Bournemouth University
Renatas Kizys
University of Portsmouth
ABSTRACT
The paper investigates the effects of oil price shocks on stock market volatility in Europe by focusing on three measures of volatility, i.e. the conditional, the realised and the implied volatility. The findings suggest that supply-side shocks and oil specific demand shocks do not affect volatility, whereas, oil price changes due to aggregate demand shocks lead to a reduction in stock market volatility. More specifically, aggregate demand oil price shocks have significant explanatory power on both current- and forward-looking volatilities. The results are qualitatively similar for aggregate stock market volatility and industrial sectors’ volatilities. Finally, a robustness exercise using short- and long-run volatility models supports the findings.
Keywords: Conditional Volatility, Realised Volatility, Implied Volatility, Oil Price Shocks, SVAR
JEL classification: C13, C32, G10, G15, Q40
Acknowledgements: We would like to thank Heather Gibson for her constructive suggestions which helped us to improve the clarity of the paper. The views expressed are those of the authors and should not be interpreted as those of their respective institutions. The authors are solely responsible for any remaining errors and deficiencies.
Correspondence:
Stavros Degiannakis
Bank of Greece
21, El. Venizelos Ave.
10250 Athens, Greece
Tel.: 0030-210-3202371
Email: sdegiannakis@bankofgreece.gr