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Crude Oil and Stock Markets: Stability, Instability, and Bubbles

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We analyze the long-run relationship between the world price of crude oil and international stock markets over 1971:1-2008:3 using a cointegrated vector error correction model with additional regressors. Allowing for endogenously identified breaks in the cointegrating and error correction matrices, we find evidence for breaks after 1980:5, 1988:1, and 1999:9. We find a clear long-run relationship between these series for six OECD countries for 1971:1-1980.5 and 1988:2-1999.9, suggesting that stock market indices respond negatively to increases in the oil price in the long run. During 1980.6-1988.1, we find relationships that are not statistically significantly different from either zero or from the relationships of the previous period. The expected negative long-run relationship appears to disintegrate after 1999.9. This finding supports a conjecture of change in the relationship between real oil price and real stock prices in the last decade compared to earlier years, which may suggest the presence of several stock market bubbles and/or oil price bubbles since the turn of the century.

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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0810.

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Length: 23 pgs.
Date of creation: 20 Aug 2008
Date of revision: 20 Jan 2009
Publication status: forthcoming in Energy Economics
Handle: RePEc:umc:wpaper:0810

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Keywords: crude oil; stock market prices; cointegrated VECM; structural stability; stock market bubble; oil price bubble;

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