Changes in oil price and economic policy uncertainty and the G7 stock returns: evidence from asymmetric quantile regression analysis

Abstract

This paper examines the asymmetric effects of changes in oil price and economic policy uncertainty (EPU) on the stock market returns of the G7 countries. It employs quantile regression analysis and allows for asymmetry by differentiating between positive and negative changes in oil price and EPU. Monthly data over the period 1985–2021 are used to conduct the analysis. Overall, we find that changes in oil price and EPU have significant asymmetric effects on the stock returns of the G7 countries and that these asymmetric effects are related to market conditions. An overall negative effect of EPU and a positive effect of oil price are observed on stock returns in all the countries. The results show that while rising EPU lowers stock returns in most countries during bearish and/or normal markets, falling EPU is either insignificant or increases stock returns only when stock markets are bullish. We also find that the impacts of positive changes in EPU are more important and larger than that of the negative changes. In addition, we find that stock returns in most countries are affected by rising and falling oil price when stock markets are bearish and/or bullish.