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Oil Price Shocks and Stock Market Booms in an Oil Exporting Country

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Abstract

This paper analyses the effects of oil price shocks on stock returns in Norway, an oil exporting country, highlighting the transmission channels of oil prices for macroeconomic behaviour. To capture the interaction between the different variables, stock returns are incorporated into a structural VAR model, as stock prices are an important transmission channel of wealth in an oil abundant country. I find that following a 10 percent increase in oil prices, stock returns increase by 2.5 percent, after which the effect eventually dies out. The results are robust to different (linear and non-linear) transformations of oil prices. The effects on the other variables are more modest. However, all variables indicate that the Norwegian economy responds to higher oil prices by increasing aggregate wealth and demand. The results also emphasize the role of other shocks; monetary policy shocks in particular, as important driving forces behind stock price variability in the short term.

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  • Hilde C. Bjørnland, 2008. "Oil Price Shocks and Stock Market Booms in an Oil Exporting Country," Working Paper 2008/16, Norges Bank.
  • Handle: RePEc:bno:worpap:2008_16
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    Keywords

    VAR; oil price shocks; monetary policy; stock market.;

    JEL classification:

    • 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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