Unraveling the Asymmetric Dynamics of Oil Price Shocks and Market Volatility on Stock Returns: Evidence from Nardl Panel Approach

Abstract This study investigates the asymmetric interaction between oil price shocks and stock returns and market volatility in a heterogeneous panel of economies using the Nonlinear Autoregressive Distributed Lag (NARDL) panel model. Though the relationship between oil prices, market volatility, and stock returns has been thoroughly studied, the asymmetric effects—the manner in which positive and negative shocks have impacted stock returns differently—are not so extensively studied. By exploiting high-frequency data for multiple markets, we distinguish the short- and long-horizon asymmetries in oil price shock and volatility transmissions to equity returns. We find that positive shocks to oil prices have a stronger and longer-lasting impact on equity returns than negative shocks, highlighting the implicit market reaction asymmetry. Similarly, we observe that market volatility increases have a stronger negative effect on stock returns compared to decreases, indicating the existence of risk aversion and investor sentiment. The panel NARDL approach enables us to account for cross-sectional heterogeneity and time effects and thus derive strong evidence of asymmetric spillovers. These results are of concern to policymakers, portfolio managers, and investors since they yield insights into the selection of risk management policy and policy formulation with regard to offsetting the adverse effect of oil price volatility and market uncertainty on financial markets.