Oil shocks, policy uncertainty and stock market return

Kang, Wensheng and Ratti, Ronald A. (2013): Oil shocks, policy uncertainty and stock market return. Published in: Journal of International Financial Markets, Institutions & Money No. 26 (2013): pp. 305-318.

Abstract

Oil price shocks and economic policy uncertainty are interrelated and influence stock market return. For the U.S. an unanticipated increase in policy uncertainty has a significant negative effect on real stock returns. A positive oil-market specific demand shock (indicating greater concern about future oil supplies) significantly raises economic policy uncertainty and reduces real stock returns. The direct effects of oil shocks on real stock returns are amplified by endogenous policy uncertainty responses. Economic policy uncertainty and oil-market specific demand shock account for 19% and 12% of the long-run variability in real stock returns, respectively. As a robustness check, (domestic) economic policy uncertainty is shown to also significantly influence real stock returns in Europe and in energy-exporting Canada.

• Item Type: MPRA Paper
• Language: English
• Keywords: Oil shocks; economic policy uncertainty; stock returns; structural VAR
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q41 - Demand and Supply ; Prices; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy

References

Apergis, N. and Miller, S.M. (2009), “Do structural oil-market shocks affect stock prices?” Energy Economics, 31, 569-575.

Arouri, M.E.H. and Rault, C. (2011), “On the influence of oil prices on stock markets: Evidence from panel analysis in GCC countries,” International Journal of Finance and Economics, 3, 242-253.

Baker, S.R., N. Bloom, and S.J. Davis (2011), “Measuring economic policy uncertainty,” Stanford University mimeo.

Bloom, N. (2009), “The impact of uncertainty shocks,” Econometrica, 77, 623-685.

Boutchkova, M., H. Doshi, A. Durnev, and A. Molchanov (2012), “Precarious politics and return volatility,” Review of Financial Studies, 25, 1111–1154.

Durnev, A. (2011), “The real effects of political uncertainty,” Working paper, McGill University.

Elder, J. and Serletis, A. (2010), “Oil price uncertainty,” Journal of Money, Credit and Banking, 42, 1137-1159.

Filis, G., Degiannakis, S. and Floros, C. (2011), “Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries,” International Review of Financial Analysis, 20, 152-164.

Gonçalves, S. and L. Kilian (2004), “Bootstrapping autoregressions with conditional heteroskedasticity of unknown form,” Journal of Econometrics, 123, 89-120.

Hamilton, J.D. (2009), “Causes and consequences of the oil shock of 2007-08,” Brookings Papers on Economic Activity, Spring, 215-261.

Jimenez-Rodrgiuez, R. and M. Sanchez (2005), “Oil price shocks and real GDP growth, empirical evidence for some OECD countries," Applied Economics, 37, 201-228.

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

Kilian, L. (2009), “Not all oil price shocks are alike: disentangling demand and supply shocks in the crude oil market,” American Economic Review, 99, 1053-1069.

Kilian, L. and C. Park (2009), “The impact of oil price shocks on the U.S. stock market,” International Economic Review, 50, 1267-1287.

Kilian, L. and D.P. Murphy (in press), “The role of inventories and speculative trading in the global market for crude oil,” Journal of Applied Econometrics.

Kilian L. and C. Vega (2011), "Do energy prices respond to U.S. macroeconomic news? A test of the hypothesis of predetermined energy prices," The Review of Economics and Statistics, 93, 660-671.

Kling, J.L. (1985), “Oil price shocks and stock-market behavior,” Journal of Portfolio Management, 12, 34–39.

Lee, K. and S. Ni (2002), “On the dynamic effects of oil price shocks: A study using industry level data,” Journal of Monetary Economics, 49, 823–852.

Miller, J.I. and R.A. Ratti (2009), “Crude oil and stock markets: Stability, instability, and bubbles,” Energy Economics, 31, 559-568.

O'Neil, T.J., J. Penm, and R.D. Terrell (2008), “The role of higher oil prices: A case of major developed countries,” Research in Finance, 24, 287-299.

Park, J. and R.A. Ratti (2008), “Oil prices and stock markets in the U.S. and 13 European countries,” Energy Economics, 30, 2587-2608.

Pastor, L. and P. Veronesi (2012), “Uncertainty about government policy and stock prices,” Journal of Finance, 67, 1219–1264.

Peersman, G. and I. Van Robays (2012), “Cross-country differences in the effects of oil shocks,” Energy Economics, 34, 1532–1547.

Rahman, S. and A. Serletis (2011), “The asymmetric effects of oil price shocks,” Macroeconomic Dynamics, 15, 437-471.

Sadorsky, P. (1999), “Oil price shocks and stock market activity,” Energy Economics, 21, 449-469.

Sims, C.A. (1996), “Comment on Glenn Rudebusch’s ‘Do measures of monetary policy in a VAR make sense?’” International Economic Review, 39, 993-941.

Sims C.A., J.H. Stock and M. Watson (1990), “Inference in linear time-series models with some unit roots,” Econometrica, 58, 113-144.

Yoon, K.H. and R.A. Ratti (2011), “Energy price uncertainty, energy intensity and firm investment,” Energy Economics, 33, 67-78.