Oil supply and demand shocks and stock price: Evidence for some OECD countries

Dhaoui, Abderrazak and Saidi, Youssef (2015): Oil supply and demand shocks and stock price: Evidence for some OECD countries.

Abstract

This paper examines the interactive relationships between oil price shocks and stock market in 11 OECD countries using Vector Error Correction Models (VECM). Considering both world oil production and world oil prices to supervise for oil supply and oil demand shocks, strong evidence of sensitivity of stock market returns to the oil price shocks specifications is found. As for impulse response functions, it is found that the impact of oil price shocks substantially differs along the different countries and that the results also differ along the various oil shock specifications. Our finding suggests that oil supply shocks have a negative effect on stock market returns in the net oil importing OECD countries. However, the stock market returns are negatively impacted by oil demand shocks in the oil importing OECD countries, and positively impacted in the oil exporting OECD countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Oil price; Stock market return; Oil supply shocks; Oil demand shocks, Vector Error Correction Models.
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy

References

Aloui, C. and Jammazi, R. (2009), “The effects of crude oil shocks on stock market shifts behavior: A regime switching approach”, Energy Economics, vol. 31, pp. 789-799.

Apergis, N. and Miller, S.M., (2009), “Do structural oil-market shocks affect stock prices?”, Energy Economics, vol. 31, Issue 4, pp. 569-575.

Arouri, M., Dinh, T.H., & Nguyen, D.K. (2010), “Time-varying predictability in crude oil markets: The case of GCC countries”, Energy Policy, 38, 4371–4380.

Arouri, M.E.H., Jouini, J., Nguyen, D.K., (2012), “On the impacts of oil price fluctuations on European equity markets: volatility spillover and hedging effectiveness”, Energy Economics. 34, 611–617.

Basher, S.A. and Sadorsky, P., (2006), “Oil price risk and emerging stock markets”, Global Finance Journal, vol. 17, pp. 224-251.

Bernanke, B.S., (1983), “Irreversibility, uncertainty, and cyclical investment”, Quarterly Journal of Economics, vol. 98, pp. 115-134.

Bernanke, B.S., Gertler, M., and Watson, M.W., (1997), “Systematic monetary policy and the effects of oil shocks”, Brookings Papers on Economic. Activity, vol. 1, pp. 91-157.

Chang, K.L., and Yu, S.T., (2013), “Does crude oil price play an important role in explaining stock return behavior?”, Energy Economics, vol. 39, pp. 159-168.

Chen, N., Roll, R., Ross, S.A., (1986), “Economic forces and the stock market”, The Journal of Business, vol. 59, Issue 3, pp. 383-403.

Christiano, L.J., (1992), “Searching for breaks in GNP”, Journal of Business and Economic Statistics, vol. 10, pp. 237–250.

Ciner, C., (2001), “Energy shocks and financial markets: nonlinear linkages”, Studies in Non-linear Dynamics and Econometrics, vol. 5, pp. 203-212.

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

Cunado, J., and Perez de Gracia, F., (2003), “Do oil price shocks matter? Evidence for some European countries”, Energy Econmics, vol 25, pp. 137-154.

Cunado, J., and Perez de Gracia, F., (2005), “Oil prices, economic activity and inflation: evidence for some Asian economies”, The Quarterly Review of Economics and Finance, vol. 45, pp. 65-83.

Cunado, J., and Perez de Gracia, F., (2014), “Oil price shocks and stock market returns: Evidence for some European countries”, Energy Econmics, vol. 42, pp. 365-377.

Driesprong, G., Jacobsen, B., and Maat B., (2008), “Striking Oil: Another Puzzle?”, Journal of Financial Economics, vol. 89, n° 2, pp. 307-327.

El-Sharif, I., Brown, D., Burton, B., Nixon, B., and Russell, A., (2005), “Evidence on the nature and extent of the relationship between oil prices and equity values in the UK”, Energy Economics, vol. 27, pp. 819-830.

Elyasiani, E., Mansur, I., Odusami, B., (2011), “Oil price shocks and industry stock returns”, Energy Economics. 33, 966–974.

Engemann, K.M., Kliesen, K.L., and Owyang, M.T., (2011), “Do oil shocks drive business cycle? Some US and international evidence”, Macroeconomic Dynamics, vol. 15, pp. 298-517.

Güntner, J.H., (2013), “How do international stock markets responds to oil demand and supply shocks?”,Macroeconomic Dynamics, First View Article, pp. 1-26. DOI:http://dx.doi.org/10.1017/S1365100513000084.

Hong, H., Torous, W., and Valkanov, R., (2002), “Do Industries Lead the Stock Market? Gradual Diffusion of Information and Cross-Asset Return Predictability”, Working Paper, Stanford University & UCLA.

Huang, R., Masulis, R.W., Stoll, H.R., (1996), “Energy Shocks and Financial Markets”, Journal of Futures Markets, vol. 16, Issue 1, pp. 1-27.

Issac, M.J., and Ratti, R.A., (2009), “Crude Oil and stock markets: Stability, instability, and bubbles”, Energy Economics, vol. 31, pp. 559-568.

Johansen, S., (1988), “Statistical analysis of cointegrating vectors”, Journal of Economic Dynamics Control, vol.12, 231–254.

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

Jones, C.M., and Kaul, G., (1996), “Oil and the Stock Market”, Journal of Finance, vol. 51, n° 2,pp. 463-491.

Jouini, J., (2013), “Return and volatility interaction between oil prices and stock markets in Saudi Arabia”, Journal of Policy Modeling, vol. 35, pp. 1124-1144.

Kilian, L., (2009), “Not all oil price shocks are alike: disentangling demand and supply shocks in the crude oil market”, American Economic Review, vol. 99, n° 3, pp. 1053-1069.

Kilian, L., Park, C., (2009), “The impact of oil price shocks on the US stock market”, International Economic Review, vol. 50, Issue 4, pp. 1267-1287.

Lee, B.J., Yang, C.H., and Huang, B.H., (2012), “Oil price movements and stock market revisited: a case of sector stock price indexes in the G7 countries”, Energy Economics, vol. 34, pp. 1284-1300.

Lee, J., Strazicich, M.C., (2001), “Break point estimation and spurious rejections with endogenous unit root tests”, Oxford Bulletin Economics and Statistics, vol. 63, pp. 535–558.

Lee, J., Strazicich, M.C., (2003), “Minimum LM Unit Root Test with Two Structural Breaks”, Review of Economics and Statistics, vol. 85, n° 4, pp. 1082-1089.

Lee, J., Strazicich, M.C., (2004) “Minimum LM unit root test with one structural break” Working Paper 04-17, Department of Economics, Appalachian State University, Boone, North Carolina.

Lee, Y.H., and Chiou, J.S., (2011), “Oil sensitivity and its asymmetric impact on the stock market”, Energy, vol. 36, pp. 168-174.

Mohanty, S.K., Nandha, M., Turkistani, A.Q., and Alaitani, M.Y., (2011), “Oil price movements and stock market returns: Evidence from Gulf Cooperation Council (GCC) countries”, Global Finance Journal, vol. 22, pp. 42-55.

Naifar, N., and Al Dohaiman, M.S.,(2013), “Nonlinear analysis among crude oil prices, stock markets’ return and macroeconomic variables”, International Review of Economics and Finance, vol. 27, pp. 416-431.

Nandha, M., and Faff, R., (2008), “Does oil move equity prices? A global view”, Energy Economics, vol. 30, pp. 986-997.

Nguyen, C.C., and Bhatti, M.I., (2012), “Copula model dependency between oil prices and stock markets: Evidence from China and Vietnam”, Journal of International Financial Markets, Institutions and Money, vol. 22, n° 4, pp. 758-773.

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

Papapetrou, E., (2001), “Oil Price Shocks, Stock Market, Economic Activity and Employment in Greece”, Energy Economics, vol. 23, pp. 511-532.

Park, J., and Ratti, R.A., (2008), “Oil price shocks and stock markets in the US and 13 European countries”, Energy Economics, vol. 30, pp. 2587-2608.

Perron, P., Vogelsang, T.J., (1992),“Nonstationarity and level shifts with an application to purchasing power parity”, Journal of Business and Economic Statistics, vol. 10, pp.301–320.

Pindyck, R., (1991), “Irreversibility, uncertainty and investment”, Journal of Economic Literature, vol. 29, n° 3, pp. 1110-1148.

Reboredo, J.C., and Rivera-Castro, M.A., (2013), “Wavelet-based evidence of the impact of oil prices on stock returns”, International Review of Economics and Finance, http://dx.doi.org/10.1016/j.iref.2013.05.014.

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

Shimon, A., and Raphael, S., (2006), “Exploiting the Oil-GDP effect to support renewable development”, Energy Policy, vol. 34, n° 17, pp. 2805-2819.

Sims, C.A., (1980), “Macroeconomics and reality", Econometrica, vol. 48, pp. 1–48.

Zhu, H.M., Li, R., and Li, S., (2014), “Modeling dynamic dependence between crude oil prices and Asia-Pacific stock market returns”, International Review of Economics and Finance, vol. 29, pp. 208-223.

Zivot, E., Andrews, D.W.K., 1992. “Further evidence on the great crash, the oil price shock and the unit root hypothesis”. Journal of Business and Economic Statistics, vol. 10, pp. 251–270.