The impact of oil price fluctuations on stock markets in developed and emerging economies

Le, Thai-Ha and Chang, Youngho (2011): The impact of oil price fluctuations on stock markets in developed and emerging economies.

Abstract

This study examines the response of stock markets to oil price volatilities in Japan, Singapore, Korea and Malaysia by applying the generalized impulse response and variance decomposition analyses to the monthly data spanning 1986:01 – 2011:02. The results suggest that the reaction of stock markets to oil price shocks varies significantly across markets. Specifically, the stock market responds positively in Japan while negatively in Malaysia; the sign for Singapore and South Korea is unclear. We find that the stock market inefficiency, among others, appeared to have slowed the responses of the stock market to aggregate shocks such as oil price surges.

• Item Type: MPRA Paper
• Language: English
• Keywords: oil price fluctuation, stock return, exchange rate, emerging market, VAR model.
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; F - International Economics > F3 - International Finance; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy

References

Abdelaziz, M., G. Chortareas and A. Cipollini (2008). Stock Prices, Exchange Rates, and Oil: Evidence from Middle East Oil-Exporting Countries. Social Science Research Network (SSRN), 44, pp. 1-27.

Al-Fayoumi, N.A. (2009). Oil Prices and Stock Market Returns in Oil Importing Countries: The Case of Turkey, Tunisia and Jordan.European Journal of Economics, Finance and Administrative Sciences, 16, pp. 86-101.

Anoruo, E. and M. Mustafa (2007). An empirical investigation into the relation of oil to stock market prices. North American Journal of Finance and Banking Research, 1(1), pp. 22-36.

Arouri, M.H. and J. Fouquau (2009).On the short-term influence of oil price changes on stock markets in GCC countries: linear and nonlinear analyses. Economics Bulletin, 29(2), pp.806-815.

Basher, S.A. andP.Sadorsky (2006).Oil price risk and emerging stock markets.Global Finance Journal, 17, pp. 224–251.

Bjørnland, H.C. (2009). Oil Price Shocks and Stock Market Booms in an Oil Exporting Country. Paper provided by Norges Bank in its series Working Paper with number 2008/16.Scottish Journal of Political Economy, 56(2), pp. 232-254.

Breitenfellner, A. and J.C. Cuaresmo (2008). Crude Oil Prices and the USD/EURExchange Rate.Monetary Policy and The Economy, OesterreichischeNationalbank (Austrian Central Bank), 4, pp. 102-121.

Brook, C. (2008). Introductory Econometrics for Finance. Cambridge University Press.

Campbell, J.Y. (1991). A Variance Decomposition for Stock Returns. Economic Journal, 101(405), pp.157-79.

Chang, Y.H. and J.F. Wong (2003). Oil price fluctuations and Singapore economy. Energy Policy, Elsevier, 31(11), pp. 1151-1165.

Cheung, Y.W. and L.K. Ng (1998).International evidence on the stock market and aggregateeconomic activity.Journal of Empirical Finance, 5, pp.281–296.

Clements, M.P. and D.F. Hendry (1995). Forecasting in Cointegrated System. Journal of Applied Econometrics, 10, pp. 127-146.

Cologni, A., and M. Manera (2008). Oil Prices, Inflation and Interest Rates in a Structural Cointegrated VAR Model for the G-7 Countries. Energy economics, 30, pp.856-888.

Cong, R.G, Wei, Y.M, Jiao, J.L and Y. Fan (2008). Relationships between oil price shocks and stock market: An empirical analysis from China. Energy Policy, 36, pp.3544– 3553.

Cunado, J. and F. Gracia (2003). Do Oil Price Shocks Matter? Evidence for some European Countries. Energy Economics, 25, pp.137-154.

Cunado, J. and F. Gracia (2005). Oil Prices, Economic Activity and Inflation: Evidence for some Asian Countries. Quarterly Review of Economics and Finance, 45, pp.65-83.

Dickey, D.A. and W.A. Fuller (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49 (4), pp. 1057–1072.

Dornbusch, R. and S. Fischer (1980). Exchange rates and current account. American Economic Review, 70, pp. 960-971.

Driesprong, G., Jacobsen, B. and B. Maat (2004). Stock markets and oil prices.Working Paper, Rotterdam School of Management, Erasmus University Rotterdam.

Engle, R.F. and B.S. Yoo (1987). Forecasting and Testing in Cointegrated Systems. Journal of Econometrics, 35, pp. 143-159.

Gavin, M. (1989). The stock market and exchange rate dynamics. Journal of International Money and Finance, 8, pp. 181-200.

Guo, H. and K. Kliesen (2005). Oil Price Volatility and U.S. Macroeconomic Activity. FederalReserve Bank of St. Louis Review, 87 (6), pp.669-683.

Hamilton, J.D. (2003). What is an Oil Shock? Journal of Econometrics, 113, pp.363-398.

Huang, R.D., Masulis, R.W. and H.R. Stoll (1996). Energy shocks and financial markets.Journal of Futures Mark, 16(1), pp.1-27.

Jawadi, F., Arouri, M. and M. Bellalah (2010). Nonlinear Linkages between Oil and Stock Markets in Developed and Emerging Countries. International Journal of Business, 15(1), pp.19-31.

Jimenez, R. and S. Marcelo (2005). Oil Price Shocks and Real GDP Growth: Empirical Evidence for Some OECD Countries.Applied Economics, 37, pp.201-228.

Johansen, S. (1988). Statistical analysis of cointegrated vectors. Journal of Economic Dynamics and Control, 12 (213), pp. 231–254.

Johansen, S. and K. Juselius (1990). Maximum likelihood estimation and inference on cointegration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52 (2), pp. 169–210.

Jones, C.M. and G. Kaul (1996). Oil and the stock markets. Journal of Finance, 51(2), pp.463-491.

Kilian, L. (2007). Not All Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market. American Economic Review, 99, pp.1053-1069.

Kilian, L. and C. Park (2009). The impact of Oil Price shocks on the US stock market. International Economic Review, 50(4), pp. 1267-1287.

Koop, G., Pesaran, M.H. and S.M. Potter (1996). Impulse response analysis in non-linear multivariate models. Journal of Econometrics 74 (1), pp. 119–147.

Kwiatkowski, D., P. C. B. Phillips, P. Schmidt, and Y. Shin (1992). Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root. Journal of Econometrics, 54, pp. 159–178.

Mishra, A. (2004). Stock market and foreign exchange market in India: are they related? South Asia Economic Journal, 5(2), pp. 209-232.

Narayan, K.P. and S. Narayan (2010). Modeling the impact of oil prices on Vietnam’s stock prices. Applied Energy, 87, pp.356-361.

Park, J. and R. Ratti (2008). Oil Prices Shocks and Stock Markets in the U.S. and 13 European Countries. Energy Economics,30(5), pp. 2587-2608.

Pesaran, M.H. and Y. Shin (1998). Generalized Impulse Response Analysis in Linear. Multivariate Models. Economics Letters, 58, pp. 17-29.

Phillips, P.C.B. and P. Perron (1988). Testing for a unit root in time series regression. Biometrika, 75 (2), pp. 335–346.

Sadorsky, P. (1999). Oil price shocks and stock market activity. Energy Economics, 21, pp. 449–469.

Sims, C.A. (1972). Money, Income and Causality. American Economic Review, 62(4), pp. 540-542.

Sims, C.A. (1980). An autoregressive index model for the US, 1948–1975. In: Kmenta, J., Ramsey, J. (Eds.), Large-Scale Macro Econometric Models: Theory and Practice. North-Holland, New York (Chapter 10).