Assessing The Impact of Energy Price Volatility on Indian Stock Market: Evidence from Energy Intensive Firms

Abstract

Since 1970s, it was only understood that oil price shock contributed to recession in various economies. But 1986 oil price fall episode made it noticeable realization of the asymmetric impact it holds on the macroeconomic variable in general and stock returns in specific. Various studies examined whether an increase or decrease in oil price has any asymmetric impact on stock returns. Researchers started exploring theoretical justification for the asymmetric impact of oil price shock on stock returns. Further, the relationship between stock returns and oil price shock has been time-varying and accommodated various events which resulted in structural breaks. The present study focuses on impact of various oil price shock on stock returns at firm-level. Data period covered in the study was from January 1995 to December 2020. The four objectives covered in the study includes the asymmetric impact of various oil price shock on stock returns at firm level, the impact of various sources of various oil price shock on stock returns. Further, study examines the time- varying effect of oil price shock on stock returns at firm-level. It also examines whether oil prices can be substituted by coal and electricity. The current study employs P-SAVR model to examine the asymmetric impact of various oil price shocks on stock returns at firm-level. Also, to investigate the impact of sources of various oil price shocks, study employs P-SVAR. Also, in order to test the relationship between various oil price shocks and stock returns at various time periods, the present study employs Lluis Carrion-i-Silvestre et al. (2005). For structural breaks with cointegration study employs Westerlund and Edgerton (2008), Banerjee and Carrion-i-silvestre (2017). Empirical results suggests that net oil price increase has asymmetric impact on stock returns. On the other hand, the relation between oil price decrease and stock returns is symmetric. The results of second objective suggests that there is a negative relationship between oil supply shock and stock returns, so any disruptions in the supply of oil make oil price uncertain, which, in turn, has a negative impact on stock returns. Third objective results reveal long-run relationship between various oil price shock and stock returns at various structural breaks. The findings of the fourth objective suggest that there is a possibility of inter-fuel substitution in the long run. Further it indicates that oil demand is largely influenced by coal price. This means oil consumption can be substituted by coal consumption.