Has COVID-19 changed the stock return-oil price predictability pattern?

Area of Science:

• * Financial Economics
• * Market Volatility Analysis
• * Energy Market Dynamics

Background:

• * The relationship between oil prices and stock returns is a key area in financial economics.
• * The COVID-19 pandemic introduced unprecedented economic and market volatility globally.
• * Understanding market predictability during crises is crucial for investors and policymakers.

Purpose of the Study:

• * To investigate the impact of the COVID-19 pandemic on the predictive relationship between oil prices and stock returns.
• * To quantify the change in the influence of oil prices on stock returns in the Japanese market.
• * To assess the implications for financial trading strategies.

Main Methods:

• * Analysis of daily Japanese stock market data from January 4, 2020, to March 17, 2021.
• * Utilization of an empirical model controlling for seasonal effects, return controls, heteroskedasticity, persistency, and endogeneity.
• * Statistical testing to determine the significance of pandemic-induced changes in the relationship.

Main Results:

• * A substantial decline of approximately 89.5% in the influence of oil prices on stock returns was observed during the COVID-19 pandemic.
• * The pandemic's impact on economic activity and financial market stability correlated with this reduced influence.
• * The predictability of stock returns based on oil prices was significantly altered.

Conclusions:

• * The COVID-19 pandemic fundamentally altered the relationship between oil prices and stock returns in the Japanese market.
• * Reduced economic activity and heightened market instability diminished the predictive power of oil prices.
• * Trading strategies relying on oil price indicators may require re-evaluation in light of these findings.