The asymmetry of the impact of oil price shocks on economic activities: An application of the multivariate threshold model

This paper applies the multivariate threshold model to investigate the impacts of an oil price change and its volatility on economic activities (changes in industrial production and real stock returns). The statistical test on the existence of a threshold effect indicates that a threshold value does...

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Bibliographic Details
Published in:Energy economics 2005-05, Vol.27 (3), p.455-476
Main Authors: Huang, Bwo-Nung, Hwang, M.J., Peng, Hsiao-Ping
Format: Article
Language:English
Subjects:
Applied sciences
Canada
Capital market
Data analysis
Economic activity
Economic conditions
Economic data
Economic shock
Empirical research
Energy
Energy economics
Energy market
Environmental economics
Exact sciences and technology
Fossil fuels and derived products
General, economic and professional studies
Japan
Methodology. Modelling
Multivariate analysis
Multivariate threshold models
Oil
Oil market
Oil price
Oil price shock
Oil price volatility
Prices
Rates of return
Stock
Stock exchange
Stock return
Stock returns
Studies
U.S.A
Volatility
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Summary:This paper applies the multivariate threshold model to investigate the impacts of an oil price change and its volatility on economic activities (changes in industrial production and real stock returns). The statistical test on the existence of a threshold effect indicates that a threshold value does exist. Using monthly data of the US, Canada, and Japan during the period from 1970 to 2002, we conclude: (i) the optimal threshold level seems to vary according to how an economy depends on imported oil and the attitude towards adopting energy-saving technology; (ii) an oil price change or its volatility has a limited impact on the economies if the change is below the threshold levels; (iii) if the change is above threshold levels, it appears that the change in oil price better explains macroeconomic variables than the volatility of the oil price; and (iv) if the change is above threshold levels, a change in oil price or its volatility explains the model better than the real interest rate.
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2005.03.001