UNRAVELING THE ASYMMETRIC DYNAMICS OF OIL PRICE SHOCKS AND MARKET VOLATILITY ON STOCK RETURNS: EVIDENCE FROM NARDL PANEL APPROACH
DOI:
https://doi.org/10.2478/eoik-2025-0059Keywords:
Oil Price Shocks, Market Volatility, Liquidity Shocks, Stock Returns, NARDL, Risk Premiums, Global FinancialAbstract
This study explores the asymmetric oil price shock dynamics, market volatility, liquidity shock, and stock returns in a panel of nations during the period 2000-2024. Using the Nonlinear Autoregressive Distributed Lag (NARDL) panel method and application of robust econometric techniques, we explore the impact of changes in oil prices on market volatility, erode liquidity levels, and subsequently influence stock returns. We show that our findings are associated with large asymmetries, whereby stock returns respond more to the rise than fall in oil prices, and that market volatility increases during periods of negative shock. We find that increased volatility also amplifies liquidity shocks so that risk premiums rise and stocks return less. We also discuss regional differences as well as how macroeconomic conditions moderate these channels. The evidence highlights liquidity as a principal mechanism of transmission from volatility to the performance of the stock market and indicates its role in determining global equity returns. The study contributes to financial market behavior knowledge and provides valuable implications for policymakers and investors with a requirement to work through periods of economic uncertainty.
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