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Do Structural Oil-Market Shocks Affect Stock Prices?

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  • Nicholas Apergis

    (University of Piraeus)

  • Stephen M. Miller

    (University of Connecticut and University of Nevada, Las Vegas)

Abstract

This paper investigates how explicit structural shocks that characterize the endogenous character of oil price changes affect stock-market returns in a sample of eight countries --- Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. For each country, the analysis proceeds in two steps. First, modifying the procedure of Kilian (2008a), we employ a vector error-correction or vector autoregressive model to decompose oil-price changes into three components: oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks. The last component relates to specific idiosyncratic features of the oil market, such as changes in the precautionary demand concerning the uncertainty about the availability of future oil supplies. Second, recovering the oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks from the first analysis, we then employ a vector autoregressive model to determine the effects of these structural shocks on the stock market returns in our sample of eight countries. We find that international stock market returns do not respond in a large way to oil market shocks. That is, the significant effects that exist prove small in magnitude.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2008-51.

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Date of creation: Jul 2008
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Publication status: Published in Energy Economics, July 2009.
Handle: RePEc:uct:uconnp:2008-51

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Phone: (860) 486-4889
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Web page: http://www.econ.uconn.edu/
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Keywords: real stock returns; structural oil-price shocks; variance decomposition;

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