ABSTRACT
We investigate the association between the stock return distributions of 10 major U.S. sectors and oil returns within a double-threshold FIGARCH model. is model nests GARCH, IGARCH and Fama-French specications as its special cases and allows a test of their validity. is model also has the advantage of capturing not only the short-run dynamics (as in the standard GARCH model), but also the long-run persistence pattern of oil shock eects that may decay at a slower hyperbolic pace. We nd that: (i) data reject the more restricted GARCH, IGARCH and FamaFrench models in favour of FIGARCH, (ii) oil return is a signicant determinant of every sector’s return and/or return volatility, (iii) oil eects are asymmetric for oil returns above and below the thresholds, (iv) asymmetry is stronger when oil return volatility is greater, (v) volatilities of sectoral returns exhibit threshold-based regime shis and (vi) oil shock eects follow a hyperbolic, rather than an exponential decay pattern, establishing long-term persistence of shocks. Policy implications are drawn.
