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Do exchange rate and inflation rate matter in the cyclicality of oil price and stock returns?

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  • Philips, Abiodun S.
  • Akinseye, Ademola B.
  • Oduyemi, Gabriel O.

Abstract

The cyclicality of oil prices and stock returns in oil-exporting and oil-importing countries is investigated in this study. We considered the role of asymmetry along with the impact of inflation and exchange rate on the cyclical relationship. The cycle component of oil prices and stock returns is extracted using the Hamilton Filter, and the slope coefficient homogeneity is determined using the Swamy (1970) test. The nonlinear Panel ARDL developed by Shin et al. (2014) is employed as the estimation method to study the cyclical nexus of oil price and stock returns. Our findings indicate that when asymmetry is taken into account, the influence of inflation rate on the cyclical link between oil prices and stock returns is insignificant. However, we find the role of exchange rate significant. We find that the exchange rate transforms an initially procyclical link between the oil price and stock returns in oil-exporting nations into a short-run countercyclical relationship. It also transforms a supposedly countercyclical relationship between oil price and stock returns in oil-importing into a long-run procyclical relationship. Overall, the exchange rate is critical to the cyclicality of oil prices and stock returns, whereas inflation is negligible.

Suggested Citation

  • Philips, Abiodun S. & Akinseye, Ademola B. & Oduyemi, Gabriel O., 2022. "Do exchange rate and inflation rate matter in the cyclicality of oil price and stock returns?," Resources Policy, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:jrpoli:v:78:y:2022:i:c:s0301420722003270
    DOI: 10.1016/j.resourpol.2022.102882
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