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Explaining the time-varying effects of oil market shocks on US stock returns

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  • Foroni, Claudia
  • Guérin, Pierre
  • Marcellino, Massimiliano

Abstract

This paper documents time-variation in the relation between oil price and US equity returns based on both reduced-form and structural analyses. Our reduced-form analysis suggests that the sign of the relation between real oil returns and real stock returns has changed over time, and that in the recent period this relation has turned positive since early 2007 (but started increasing since 2005). Based on our structural analysis, we find that oil-specific demand shocks have had positive effects on the US stock market since 2009 as opposed to oil supply shocks, which have no large effects on stock returns. We also show that the time variation in the parameters of the structural VAR is very well explained by the level of the US short-term interest rate and shifts in consumer confidence.

Suggested Citation

  • Foroni, Claudia & Guérin, Pierre & Marcellino, Massimiliano, 2017. "Explaining the time-varying effects of oil market shocks on US stock returns," Economics Letters, Elsevier, vol. 155(C), pages 84-88.
    • Handle: RePEc:eee:ecolet:v:155:y:2017:i:c:p:84-88
    DOI: 10.1016/j.econlet.2017.03.017
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    More about this item

    Keywords

    Stock returns; Oil market shocks; Time-varying parameter VAR;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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