Spillovers between oil and stock returns in the US energy sector: Does idiosyncratic information matter?

This paper investigates the inter-connectedness between WTI oil price returns and the returns of listed firms in the US energy sector. Specifically, we focus on the issue of whether firm-level idiosyncratic information matters. A generalised dynamic factor model is used to separate common components from idiosyncratic components in these energy stocks. Systemic connectedness is then estimated following Diebold and Yilmaz (2014). Our empirical results demonstrate the important role of industrial-level common information in understanding the oil-stock relationship. A number of interesting points include: the US energy sector is the net contributor to WTI price changes, but the effect is mainly driven by industrial-level common information; the oil and gas industry dominates other industries in the energy sector; the dynamic analysis shows that although idiosyncratic information is mostly independent of oil shocks, individual energy stock returns do respond to WTI price movements. (C) 2019 Elsevier B.V. All rights reserved.