Analyzing the impact of energy prices on US stock market volatility

Abbas Khan, Abdul Razzaq and Muhammad Abbas Khan

Abstract

This study investigates the time-varying impact of energy prices on the US stock market, using monthly data from January 1986 to December 2023. The research explores the interplay between crude oil, natural gas and electricity prices and stock returns through a maximal overlap discrete wavelet transform-based quantile regression analysis. This study extensively examines alternative energy prices along with those of crude oil, demonstrating that energy shocks have asymmetric and time-varying impacts on equity returns. The findings reveal distinct supply-and-demand-driven effects. While crude oil prices exhibit an asymmetric relationship with stock returns, with rising prices negatively affecting equity markets in the long run, natural gas and electricity prices demonstrate significant supply-driven effects, mitigating the adverse impacts of crude oil price fluctuations. These results emphasize the importance of alternative energy sources such as shale gas and renewables in moderating oil price shocks, and they highlight the role of energy price volatility in shaping market behavior.