Oil Price Shocks and the Connectedness of US State-level Financial Markets

Onur Polat*, Juncal Cunado, Oguzhan Cepni, Rangan Gupta

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

This paper investigates the impact of oil supply, demand, and risk shocks on U.S. state-level stock and bond returns, utilizing daily data from February 1994 to March 2024. It examines the individual effects of oil price shocks on each state's stock and bond returns and explores how fluctuations in oil prices influence the interdependence between state-level stock and bond markets. The findings reveal that oil demand shocks have a significant positive impact, while oil supply shocks have a significant negative impact on state-level stock returns. Although state-level bond returns also react to these supply and demand shocks, their response is statistically less significant than that of stock returns, indicating that cross-asset diversification is possible during periods of oil supply and demand shocks. However, both stock and bond returns are significantly and negatively affected by oil risk shocks, which implies limited opportunities for cross-asset diversification when oil price fluctuations are driven by risk factors. Additionally, the interdependence between U.S. equity and bond markets is more significantly influenced by oil risk shocks than by supply or demand shocks, suggesting an increase in the interconnectedness of stock and bond returns following an oil risk shock. Further analysis, using a reverse-MIDAS model to relate high-frequency connectedness measures to monthly oil price shocks, indicates that oil supply shocks positively and significantly impact stock market connectedness, while oil inventory demand shocks negatively affect bond market connectedness. Implications of our findings are discussed.
Original languageEnglish
Article number108128
JournalEnergy Economics
Volume141
Number of pages17
ISSN0140-9883
DOIs
Publication statusPublished - Jan 2025

Bibliographical note

Published online: 12 December 2024.

Keywords

  • Oil price shocks
  • State-level stock market returns
  • State-level municipal bond returns
  • Connectedness

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