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

• Main Authors: Fan Zhang, Paresh Kumar Narayan, Neluka Devpura
• Format: Article
• Language: English
• Published: SpringerOpen 2021-08-01
• Series: Financial Innovation
• Subjects: COVID-19; Oil prices; Stock returns
• Online Access: https://doi.org/10.1186/s40854-021-00277-7

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.