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

Author

Listed:
  • 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.

Suggested Citation

  • Ramón Cobo-Reyes & Gabriel Pérez Quirós, 2005. "The effect of oil price on industrial production and on stock returns," ThE Papers 05/18, Department of Economic Theory and Economic History of the University of Granada..
  • Handle: RePEc:gra:wpaper:05/18
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    File URL: http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers05_18.pdf
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    References listed on IDEAS

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    3. Pilar Bengoechea & Gabriel Pérez-Quirós, 2004. "A useful tool to identify recessions in the euro-area," Working Papers 0419, Banco de España.
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    8. 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.
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    Cited by:

    1. Tiwari, Aviral Kumar & Nasreen, Samia & Shahbaz, Muhammad & Hammoudeh, Shawkat, 2020. "Time-frequency causality and connectedness between international prices of energy, food, industry, agriculture and metals," Energy Economics, Elsevier, vol. 85(C).
    2. 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.
    3. Ramos, Sofia B. & Veiga, Helena, 2011. "Risk factors in oil and gas industry returns: International evidence," Energy Economics, Elsevier, vol. 33(3), pages 525-542, May.
    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.
    5. 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.

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    More about this item

    Keywords

    oil price; Markov switching models.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • 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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