Impacts of Oil Price Shock on Sector Returns with Regime-Switching Approach: New Evidence from Indonesian Stock Market

Authors

  • Mohammad A. Dharmawan Bogor Agricultural University
  • Dominicus S. Priyarsono Bogor Agricultural University
  • Bagus Sartono Bogor Agricultural University

Abstract

This study investigates the impacts of an oil price shock on sector returns in the Indonesian stock market. Oil prices and the stock market are both important elements of the Indonesian economy. The research attempts to characterize the impacts and causality relationship between oil price shocks and sector returns, with time segmentation based on structural breaks in oil price data from 1996 to 2016. We applied structural-break analysis to oil prices using the Bai-Perron procedure and identified three break points, thereby dividing the data set into four different regimes. We analyzed the impacts of oil price shocks and sector returns using an unrestricted Vector Autoregression (VAR) model. The findings indicated that impacts of the oil price shocks on sector returns vary, depending on the regime in which the shocks occurred. In general, during low and stable oil price regimes, the impacts of oil price shocks on sector returns were not significant, whereas for high oil price and high volatility regimes, oil price shocks affected some sectors significantly.

Keywords: oil price shock, stock returns, vector autoregression

JEL Classifications: C22, E44, G11

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Author Biographies

Mohammad A. Dharmawan, Bogor Agricultural University

Business School, Graduate Student

Dominicus S. Priyarsono, Bogor Agricultural University

Faculty of Economics and Management, Professor

Bagus Sartono, Bogor Agricultural University

Department of Statistics, Associate Professor

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Published

2017-11-01

How to Cite

Dharmawan, M. A., Priyarsono, D. S., & Sartono, B. (2017). Impacts of Oil Price Shock on Sector Returns with Regime-Switching Approach: New Evidence from Indonesian Stock Market. International Journal of Energy Economics and Policy, 7(5), 44–59. Retrieved from https://www.econjournals.com/index.php/ijeep/article/view/5359

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Articles