IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/81638.html
   My bibliography  Save this paper

The impact of oil-market shocks on stock returns in major oil-exporting countries: A Markov-switching approach

Author

Listed:
  • Basher, Syed Abul
  • Haug, Alfred A.
  • Sadorsky, Perry

Abstract

The impact that oil shocks have on stock prices in oil exporting countries has implications for both domestic and international investors. We derive the shocks driving oil prices from a fully-identified structural model of the oil market. We study their nonlinear relationship with stock market returns in major oil-exporting countries in a multi-factor Markov-switching framework. Flow oil-demand shocks have a statistically significant impact on stock returns in Canada, Norway, Russia, Kuwait, Saudi Arabia, and the UAE. Idiosyncratic oil-market shocks affect stock returns in Norway, Russia, Kuwait, Saudi Arabia and UAE. Speculative oil shocks impact stock returns in Canada, Russia, Kuwait and the UAE. Flow oil-supply shocks matter for the UK, Kuwait, and UAE. Mexico is the only country where stock returns are unaffected by oil shocks. These results shed important light on investor sentiment toward the relationship between oil shocks and stock markets in oil exporting countries.

Suggested Citation

  • Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2017. "The impact of oil-market shocks on stock returns in major oil-exporting countries: A Markov-switching approach," MPRA Paper 81638, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:81638
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/81638/1/MPRA_paper_81638.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kilian, Lutz & Lee, Thomas K., 2014. "Quantifying the speculative component in the real price of oil: The role of global oil inventories," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 71-87.
    2. Beckmann, Joscha & Czudaj, Robert, 2013. "Is there a homogeneous causality pattern between oil prices and currencies of oil importers and exporters?," Energy Economics, Elsevier, vol. 40(C), pages 665-678.
    3. Demirer, Rıza & Jategaonkar, Shrikant P. & Khalifa, Ahmed A.A., 2015. "Oil price risk exposure and the cross-section of stock returns: The case of net exporting countries," Energy Economics, Elsevier, vol. 49(C), pages 132-140.
    4. Mohanty, Sunil K. & Nandha, Mohan & Turkistani, Abdullah Q. & Alaitani, Muhammed Y., 2011. "Oil price movements and stock market returns: Evidence from Gulf Cooperation Council (GCC) countries," Global Finance Journal, Elsevier, vol. 22(1), pages 42-55.
    5. Inoue, Atsushi & Kilian, Lutz, 2013. "Inference on impulse response functions in structural VAR models," Journal of Econometrics, Elsevier, vol. 177(1), pages 1-13.
    6. Abhay Abhyankar, Bing Xu, and Jiayue Wang, 2013. "Oil Price Shocks and the Stock Market: Evidence from Japan," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    7. Boyer, M. Martin & Filion, Didier, 2007. "Common and fundamental factors in stock returns of Canadian oil and gas companies," Energy Economics, Elsevier, vol. 29(3), pages 428-453, May.
    8. Basher, Syed A. & Sadorsky, Perry, 2006. "Oil price risk and emerging stock markets," Global Finance Journal, Elsevier, vol. 17(2), pages 224-251, December.
    9. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2012. "Oil prices, exchange rates and emerging stock markets," Energy Economics, Elsevier, vol. 34(1), pages 227-240.
    10. Christiane Baumeister & Lutz Kilian, 2016. "Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 139-160, Winter.
    11. Balcilar, Mehmet & Gupta, Rangan & Miller, Stephen M., 2015. "Regime switching model of US crude oil and stock market prices: 1859 to 2013," Energy Economics, Elsevier, vol. 49(C), pages 317-327.
    12. Kang, Wensheng & Ratti, Ronald A., 2013. "Structural oil price shocks and policy uncertainty," Economic Modelling, Elsevier, vol. 35(C), pages 314-319.
    13. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2016. "The impact of oil shocks on exchange rates: A Markov-switching approach," Energy Economics, Elsevier, vol. 54(C), pages 11-23.
    14. Hilde C. Bjørnland, 2009. "Oil Price Shocks And Stock Market Booms In An Oil Exporting Country," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(2), pages 232-254, May.
    15. Hamilton, James D., 2011. "Nonlinearities And The Macroeconomic Effects Of Oil Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 364-378, November.
    16. Kang, Wensheng & Ratti, Ronald A. & Yoon, Kyung Hwan, 2015. "Time-varying effect of oil market shocks on the stock market," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 150-163.
    17. Hamilton, J.D., 2016. "Macroeconomic Regimes and Regime Shifts," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 163-201, Elsevier.
    18. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    19. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
    20. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    21. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-182, April.
    22. Filis, George & Degiannakis, Stavros & Floros, Christos, 2011. "Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 152-164, June.
    23. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    24. Apergis, Nicholas & Miller, Stephen M., 2009. "Do structural oil-market shocks affect stock prices?," Energy Economics, Elsevier, vol. 31(4), pages 569-575, July.
    25. Syed Abul, Basher & Salem, Nechi & Hui, Zhu, 2014. "Dependence patterns across Gulf Arab stock markets: a copula approach," MPRA Paper 56566, University Library of Munich, Germany.
    26. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
    27. Boudt, Kris & Paulus, Ellen C.S. & Rosenthal, Dale W.R., 2017. "Funding liquidity, market liquidity and TED spread: A two-regime model," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 143-158.
    28. Ferson, Wayne E. & Harvey, Campbell R., 1994. "Sources of risk and expected returns in global equity markets," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 775-803, September.
    29. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-744, June.
    30. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    31. Sim, Nicholas & Zhou, Hongtao, 2015. "Oil prices, US stock return, and the dependence between their quantiles," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 1-8.
    32. Maurizio Michael Habib & Sascha Bützer & Livio Stracca, 2016. "Global Exchange Rate Configurations: Do Oil Shocks Matter?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(3), pages 443-470, August.
    33. Ms. Brenda Gonzalez-Hermosillo & Mr. Heiko Hesse, 2009. "Global Market Conditions and Systemic Risk," IMF Working Papers 2009/230, International Monetary Fund.
    34. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    35. Giampiero M. Gallo & Edoardo Otranto, 2014. "Forecasting Realized Volatility with Changes of Regimes," Econometrics Working Papers Archive 2014_03, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", revised Feb 2014.
    36. Alfred Haug & Syed Basher & Perry Sadorsky, 2016. "The impact of oil price shocks on exchange rates: A non-linear smooth-transition approach," EcoMod2016 9226, EcoMod.
    37. Kilian, Lutz & Vigfusson, Robert J., 2011. "Nonlinearities In The Oil Price–Output Relationship," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 337-363, November.
    38. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    39. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    40. Park, Jungwook & Ratti, Ronald A., 2008. "Oil price shocks and stock markets in the U.S. and 13 European countries," Energy Economics, Elsevier, vol. 30(5), pages 2587-2608, September.
    41. Ramos, Sofia B. & Veiga, Helena, 2013. "Oil price asymmetric effects: Answering the puzzle in international stock markets," Energy Economics, Elsevier, vol. 38(C), pages 136-145.
    42. Angelidis, Timotheos & Degiannakis, Stavros & Filis, George, 2015. "US stock market regimes and oil price shocks," Global Finance Journal, Elsevier, vol. 28(C), pages 132-146.
    43. El-Sharif, Idris & Brown, Dick & Burton, Bruce & Nixon, Bill & Russell, Alex, 2005. "Evidence on the nature and extent of the relationship between oil prices and equity values in the UK," Energy Economics, Elsevier, vol. 27(6), pages 819-830, November.
    44. Chen, Shiu-Sheng, 2010. "Do higher oil prices push the stock market into bear territory?," Energy Economics, Elsevier, vol. 32(2), pages 490-495, March.
    45. Herrera, Ana María & Lagalo, Latika Gupta & Wada, Tatsuma, 2011. "Oil Price Shocks And Industrial Production: Is The Relationship Linear?," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 472-497, November.
    46. Sadorsky, Perry & Henriques, Irene, 2001. "Multifactor risk and the stock returns of Canadian paper and forest products companies," Forest Policy and Economics, Elsevier, vol. 3(3-4), pages 199-208, November.
    47. Zeina Alsalman Ana María Herrera, 2015. "Oil Price Shocks and the U.S. Stock Market: Do Sign and Size Matter?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    48. Kang, Wensheng & Ratti, Ronald A., 2013. "Oil shocks, policy uncertainty and stock market return," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 305-318.
    49. Lutz Kilian & Daniel P. Murphy, 2012. "Why Agnostic Sign Restrictions Are Not Enough: Understanding The Dynamics Of Oil Market Var Models," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1166-1188, October.
    50. Wang, Yudong & Wu, Chongfeng & Yang, Li, 2013. "Oil price shocks and stock market activities: Evidence from oil-importing and oil-exporting countries," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1220-1239.
    51. Shawkat Hammoudeh & Eisa Aleisa, 2004. "Dynamic Relationships among GCC Stock Markets and Nymex Oil Futures," Contemporary Economic Policy, Western Economic Association International, vol. 22(2), pages 250-269, April.
    52. Huang, Bwo-Nung & Hwang, M.J. & Peng, Hsiao-Ping, 2005. "The asymmetry of the impact of oil price shocks on economic activities: An application of the multivariate threshold model," Energy Economics, Elsevier, vol. 27(3), pages 455-476, May.
    53. Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
    54. Jones, Charles M & Kaul, Gautam, 1996. "Oil and the Stock Markets," Journal of Finance, American Finance Association, vol. 51(2), pages 463-491, June.
    55. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-144, January.
    56. Guesmi, Khaled & Fattoum, Salma, 2014. "Return and volatility transmission between oil prices and oil-exporting and oil-importing countries," Economic Modelling, Elsevier, vol. 38(C), pages 305-310.
    57. Syed Abul Basher & Stefano Fachin, 2013. "The long-run relationship between savings and investment in oil-exporting developing countries: a case study of the Gulf Arab states," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 37(4), pages 429-446, December.
    58. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    59. Sadorsky, Perry, 2001. "Risk factors in stock returns of Canadian oil and gas companies," Energy Economics, Elsevier, vol. 23(1), pages 17-28, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alfred Haug & Syed Basher & Perry Sadorsky, 2016. "The impact of oil price shocks on exchange rates: A non-linear smooth-transition approach," EcoMod2016 9226, EcoMod.
    2. Yu, Honghai & Fang, Libing & Sun, Wencong, 2018. "Forecasting performance of global economic policy uncertainty for volatility of Chinese stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 931-940.
    3. Alfred A. Haug & Syed Abul Basher, 2019. "Exchange rates of oil exporting countries and global oil price shocks: a nonlinear smooth-transition approach," Applied Economics, Taylor & Francis Journals, vol. 51(48), pages 5282-5296, October.
    4. Muhammad Ali, Khalid M. Iraqi, Abdul Waheed Khan, 2019. "Impact of Oil Prices on Stock Market Performance: Evidence from Top Oil Importing Countries," Journal of Finance and Economics Research, Geist Science, Iqra University, Faculty of Business Administration, vol. 4(2), pages 1-14, October.
    5. Abdul Rahman, 2020. "Long run Association of Stock Prices and Crude Oil Prices: Evidence from Saudi Arabia," International Journal of Energy Economics and Policy, Econjournals, vol. 10(2), pages 124-131.
    6. Buket Altınoz & Alican Umut, 2022. "The Relationship of Exchange Rate and Oil Price Volatilities with Stock Returns: Evidence from Borsa Istanbul Sector Indexes," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 72(72-1), pages 385-405, June.
    7. Piratdin Allayarov & Bakhit Embergenov & Si Thu Han, 2018. "Problems and Prospects of sustainable tourism in the Republic of Kazakhstan," Business and Economic Research, Macrothink Institute, vol. 8(2), pages 115-126, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2018. "The impact of oil-market shocks on stock returns in major oil-exporting countries," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 264-280.
    2. Smyth, Russell & Narayan, Paresh Kumar, 2018. "What do we know about oil prices and stock returns?," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 148-156.
    3. Stavros Degiannakis & George Filis & Vipin Arora, 2018. "Oil Prices and Stock Markets: A Review of the Theory and Empirical Evidence," The Energy Journal, , vol. 39(5), pages 85-130, September.
    4. Ziadat, Salem Adel & McMillan, David G. & Herbst, Patrick, 2022. "Oil shocks and equity returns during bull and bear markets: The case of oil importing and exporting nations," Resources Policy, Elsevier, vol. 75(C).
    5. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    6. Silvapulle, Param & Smyth, Russell & Zhang, Xibin & Fenech, Jean-Pierre, 2017. "Nonparametric panel data model for crude oil and stock market prices in net oil importing countries," Energy Economics, Elsevier, vol. 67(C), pages 255-267.
    7. Alfred Haug & Syed Basher & Perry Sadorsky, 2016. "The impact of oil price shocks on exchange rates: A non-linear smooth-transition approach," EcoMod2016 9226, EcoMod.
    8. Das, Debojyoti & Kannadhasan, M., 2020. "The asymmetric oil price and policy uncertainty shock exposure of emerging market sectoral equity returns: A quantile regression approach," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 563-581.
    9. Manel Youssef & Khaled Mokni, 2019. "Do Crude Oil Prices Drive the Relationship between Stock Markets of Oil-Importing and Oil-Exporting Countries?," Economies, MDPI, vol. 7(3), pages 1-22, July.
    10. Alfred A. Haug & Syed Abul Basher, 2019. "Exchange rates of oil exporting countries and global oil price shocks: a nonlinear smooth-transition approach," Applied Economics, Taylor & Francis Journals, vol. 51(48), pages 5282-5296, October.
    11. Enwereuzoh, Precious Adaku & Odei-Mensah, Jones & Owusu Junior, Peterson, 2021. "Crude oil shocks and African stock markets," Research in International Business and Finance, Elsevier, vol. 55(C).
    12. Maghyereh, Aktham & Abdoh, Hussein, 2022. "Extreme dependence between structural oil shocks and stock markets in GCC countries," Resources Policy, Elsevier, vol. 76(C).
    13. Syed Abul, Basher, 2014. "Stock markets and energy prices," MPRA Paper 53863, University Library of Munich, Germany.
    14. Degiannakis, Stavros & Filis, George & Floros, Christos, 2013. "Oil and stock returns: Evidence from European industrial sector indices in a time-varying environment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 175-191.
    15. Lu, Xinjie & Ma, Feng & Wang, Jiqian & Zhu, Bo, 2021. "Oil shocks and stock market volatility: New evidence," Energy Economics, Elsevier, vol. 103(C).
    16. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2012. "Oil prices, exchange rates and emerging stock markets," Energy Economics, Elsevier, vol. 34(1), pages 227-240.
    17. Broadstock, David C. & Filis, George, 2014. "Oil price shocks and stock market returns: New evidence from the United States and China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 417-433.
    18. Mishra, Shekhar & Mishra, Sibanjan, 2021. "Are Indian sectoral indices oil shock prone? An empirical evaluation," Resources Policy, Elsevier, vol. 70(C).
    19. Babak Fazelabdolabadi, 2019. "Uncertainty and energy-sector equity returns in Iran: a Bayesian and quasi-Monte Carlo time-varying analysis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-20, December.
    20. Herrera, Ana María & Karaki, Mohamad B. & Rangaraju, Sandeep Kumar, 2019. "Oil price shocks and U.S. economic activity," Energy Policy, Elsevier, vol. 129(C), pages 89-99.

    More about this item

    Keywords

    Markov-switching; oil-exporting countries; oil-market shocks; stock returns;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:81638. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.