A0265
Title: Measuring contagion effects of crude oil prices on sectoral stock price indices in India
Authors: Arvind Kumar Shrivastava - Reserve Bank of India (India) [presenting]
Madhuchhanda Sahoo - Reserve Bank of India (India)
Thangzason Sonna - Reserve Bank of India (India)
Jessica Maria Anthony - Reserve Bank of India (India)
Abstract: The purpose is to explore the contagion effects of extreme changes in global crude oil prices on sectoral stock price indices in India. Using generalised Pareto distribution (GPD) for estimating excess returns or exceedances, i.e., deviations from thresholds, also a multinomial logit model (MNL) for assessing the probability of contemporaneous excess returns or co-exceedances, a significant likelihood of contemporaneous exceedances is found among ten sectoral stock price indices when faced with extreme changes in global crude oil prices pointing to the existence of a contagion effect. The evidence of positive co-exceedances is stronger, and the results are found more robust when relevant control variables are introduced, exchange rate returns (INR-USD), 10-year G-sec yield, and differential stock returns, (i.e., small firms minus big firms (SMB)). The contagion effect on all sectoral indices, irrespective of their direct and indirect exposure to oil price dynamics, highlights the need for hedging by investors as mere diversification of portfolios may not be sufficient to protect their assets from an adverse oil price shock.
