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The effect of oil price on industrial production and on stock returns

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  • Ramón Cobo-Reyes

    ()
    (Department of Economic Theory and Economic History, University of Granada)

  • Gabriel Pérez Quirós

    ()
    (Bank of Spain)

Abstract

This paper analyzes the relationship between oil price shocks and the industrial production and between oil price shocks and the stock returns. The objective is to study which relationship is stronger or which variables reacts more rapidly to changes in oil price. We develop a Markov switching model assuming that there exits a latent variable (the state of the economy) which determines the mean of industrial production and the volatility of stock returns. The results show that raises in oil price affects in a negative and statistically significant way to stock returns and to industrial production, but the effect on stock returns is stronger than on industrial production.

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File URL: http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers05_18.pdf
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Bibliographic Info

Paper provided by Department of Economic Theory and Economic History of the University of Granada. in its series ThE Papers with number 05/18.

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Length: 20 pages
Date of creation: 05 Sep 2005
Date of revision:
Handle: RePEc:gra:wpaper:05/18

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Keywords: oil price; Markov switching models.;

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References

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  1. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
  2. Pilar Bengoechea & Gabriel P�rez Quir�s, 2004. "A useful tool to identify recessions in the euro area," European Economy - Economic Papers 215, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Jones, Charles M & Kaul, Gautam, 1996. " Oil and the Stock Markets," Journal of Finance, American Finance Association, vol. 51(2), pages 463-91, June.
  4. Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
  5. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
  6. Francis X. Diebold & Glenn D. Rudebusch, 1988. "A nonparametric investigation of duration dependence in the American business cycle," Working Paper Series / Economic Activity Section 90, Board of Governors of the Federal Reserve System (U.S.).
  7. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  8. Ciner Cetin, 2001. "Energy Shocks and Financial Markets: Nonlinear Linkages," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(3), pages 1-11, October.
  9. Raymond, Jennie E & Rich, Robert W, 1997. "Oil and the Macroeconomy: A Markov State-Switching Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 193-213, May.
  10. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
  11. Hamilton, James D & Gang, Lin, 1996. "Stock Market Volatility and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 573-93, Sept.-Oct.
  12. Pilar Bengoechea & Gabriel Pérez-Quirós, 2004. "A useful tool to identify recessions in the euro-area," Banco de Espa�a Working Papers 0419, Banco de Espa�a.
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Cited by:
  1. Kapetanios, G. & Tzavalis, E., 2010. "Modeling structural breaks in economic relationships using large shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 417-436, March.
  2. Sofía B. Ramos & Helena Veiga, 2009. "Risk factors in oil and gas industry returns: international evidence," Statistics and Econometrics Working Papers ws096920, Universidad Carlos III, Departamento de Estadística y Econometría.
  3. Aloui, Chaker & Jammazi, Rania, 2009. "The effects of crude oil shocks on stock market shifts behaviour: A regime switching approach," Energy Economics, Elsevier, vol. 31(5), pages 789-799, September.
  4. Yýlmaz BAYAR & Cuneyt KILIC, 2014. "Effects of Oil and Natural Gas Prices on Industrial Production in the Eurozone Member Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 4(2), pages 238-247.

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