This paper examines the asymmetric impact of oil price uncertainty on stock returns using monthly data covered the period July 1997 to March 2016. The measure of oil price change is the logarithmic first difference of the West Texas Intermedieate(WTI) while stock return is the logarithmic first difference of the KOSPI. Oil price uncertainty is measured by the conditional standard deviation of the one-step-ahead forecast error for the change in the oil price. A bivariate GARCH-in-mean vector autoregressive model of Elder and Serletis (2010) is used for analysis. The results show that oil price uncertainty has a positive significant impact on stock returns. That is, an increase in oil price uncertainty tends to increase stock returns. The study also finds that the responses of stock returns to positive and negative oil price shocks are asymmetric since the responses are not equal in absolute terms. The negative oil price shock appears to have a larger effect than the negative oil price shock of equal size. Furthermore, the inclusion of the contemporaneous oil price volatility term in stock return equation dampens the responses of stock returns to positive oil price shock. On the other hand, it amplifies its response to a negative oil price shock at least for the first two horizons. However, the effect is significant only in the response of stock returns to positive oil price shock. Overall, these results show that oil price uncertainty matters for stock returns in Korea.
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