Do credit conditions matter for the impact of oil price shocks on stock returns? Evidence from a structural threshold VAR model

Abstract This paper aims to examine whether the effect of oil price shocks on the stock market varies across different credit conditions. Based on the U.S. monthly stock data at the aggregate level and industry levels from January 1990 to January 2018, we use a structural threshold vector autoregressive (TVAR) model to investigate reactions of stock returns to oil price shocks under different credit conditions. Our empirical results show that there exists asymmetrical response of U.S. stock returns to crude oil price shocks substantially depends on credit conditions. In particular, oil prices have a negative effect on equity market returns when the U.S. economy is in a normal credit condition, while the relationship is reversed in a tight credit condition. We find (i) that there is no significant difference in the impact of oil prices on stock returns among various industries, and (ii) that the effect of oil price shocks on stock returns is only significant in the short-term rather than in the long-term.