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Has COVID-19 changed the stock return-oil price predictability pattern?
Fan Zhang1, Paresh Kumar Narayan2, Neluka Devpura3
1School of Public Finance and Taxation, Zhejiang University of Finance and Economics, Hangzhou, China.
Abstract:
In this paper, we examine if COVID-19 has impacted the relationship between oil prices and stock returns predictions using daily Japanese stock market data from 01/04/2020 to 03/17/2021. We make a novel contribution to the literature by testing whether the COVID-19 pandemic has changed this predictability relationship. Employing an empirical model that controls for seasonal effects, return-related control variables, heteroskedasticity, persistency, and endogeneity, we demonstrate that the influence of oil prices on stock returns declined by around 89.5% due to COVID-19. This implies that when COVID-19 reduced economic activity and destabilized financial markets, the influence of oil prices on stock returns declined. This finding could have implications for trading strategies that rely on oil prices.
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