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Oil price volatility and sectoral returns uncertainties: evidence from a threshold based approach for the Australian equity market

Ali Ahmed, Huson and Wadud, IKM Mokhtarul 2017, Oil price volatility and sectoral returns uncertainties: evidence from a threshold based approach for the Australian equity market, Journal of developing areas, vol. 51, no. 1, Winter 2017, pp. 329-342.

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Title Oil price volatility and sectoral returns uncertainties: evidence from a threshold based approach for the Australian equity market
Author(s) Ali Ahmed, Huson
Wadud, IKM MokhtarulORCID iD for Wadud, IKM Mokhtarul orcid.org/0000-0003-3846-5615
Journal name Journal of developing areas
Volume number 51
Issue number 1
Season Winter 2017
Start page 329
End page 342
Total pages 14
Publisher Tennessee State University College of Business
Place of publication Nashville, Tenn.
Publication date 2017-04-16
ISSN 0022-037X
Keyword(s) equity return volatility
oil price volatility
threshold
transition model
sectoral volatility
Summary This paper examines the existence of a non-linear relationship between oil price volatility andequity market uncertainty. The study specifically analyses the pattern of effects of oil pricevolatility on the broader equity market as well as the sectoral equity returns volatility withinAustralian Economy. We use a logistic transition based autoregressive model (LSTR) developedby Teräsvirta and Anderson (1992) and Teräsvirta, (1994). We find that the hypothesis oflinearity between oil price volatility and equity market uncertainty is rejected for six out of 10sectors of the Australian economy. The retention of LSTR model suggests that the oil returnvolatility has high and low regimes that affect equity markets differently across the sectors. Thetransition functions suggest that switching of oil price volatility from low to high regime isabrupt for consumer discretion, financial and material sectors while such transition is smoothfor consumer staple, energy, and industrial sectors. The results also show that some sectors arequicker in responding to heightened volatility. From the VAR framework, the impulse responsefunctions show that a one period increase or a shock in oil price volatility raises volatility ofequity in consumer discretion, consumer staple, finance, industry, telecom and consumer staplesectors. Of these, equity volatility in industries and financial sectors seem to exhibit a prolongedpositive response following the oil price volatility shock. Also, equity volatility of industriesseems to rise by much larger proportion compared to the equity volatility response of othersectors. These findings are helpful as a guide for sectoral rotation strategies. In view of theincreased volatility of oil prices due to a negative impact of oil price shock and the resultantsurge of uncertainty, Australian firms could formulate their short and long run investment plansbased on volatility threshold level. Firms in consumer discretion, financial and industrial sectorcould consider postponement of investment if the volatility in oil price exceeds certain threshold.Also, firms in the consumer staple, energy and materials industry need to make prudent businessdecisions in situations where oil price volatility falls within the threshold range as identified bythe LSTR2 models. Based on the findings, there is a need for public policy formulation to reducethe adverse impacts of increased oil price uncertainties on the Australian economy duringperiods of unforeseen random events including depressions and crises.
Language eng
Field of Research MD Multidisciplinary
150103 Financial Accounting
1402 Applied Economics
Socio Economic Objective 0 Not Applicable
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2017, Journal of Developing Areas
Persistent URL http://hdl.handle.net/10536/DRO/DU:30094217

Document type: Journal Article
Collections: Open Access Checking
Department of Economics
Department of Finance
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