Oil-US Stock Market Nexus: Some insights about the New Coronavirus Crisis

TL;DR

This study investigates how the COVID-19 pandemic influenced the relationship between oil and US stock markets using wavelet analysis, revealing increased co-movement and lead-lag dynamics during specific periods of the crisis.

Contribution

It introduces a wavelet-based approach to analyze the COVID-19 impact on oil-stock market interactions, highlighting the amplification of shocks during the pandemic.

Findings

Co-movements occur at 3-5 day cycles.

Oil prices led stock prices in early March and late April 2020.

COVID-19 amplifies shock transmission between markets.

Abstract

We provide a new investigation of the relationship between oil and stock prices in the context of the outbreak of the new coronavirus crisis. Specifically, we assess to what extent the uncertainty induced by COVID-19 affects the interaction between oil and the United States (US) stock markets. To this end, we use a wavelet approach and daily data from February 18, 2020 to August 15, 2020. We identify the lead-lag relationship between oil and stock prices, and the intensity of this relationship at different frequency cycles and moments in time. Our unique findings show that co-movements between oil and stock prices manifest at 3-5-day cycle and are stronger in the first part of March and the second part of April 2020, when oil prices are leading stock prices. The partial wavelet coherence analysis, controlling for the effect of COVID-19 and US economic policy-induced uncertainty, reveals that the coronavirus crisis amplifies the shock propagation between oil and stock prices.