Oil Price Shocks and Stock Market Returns: Evidence from Oil-Importing and Oil-Exporting Countries

TLDR: In this paper, a structural VAR analysis of the stock market response to oil price shocks is presented, showing that the magnitude, duration, and even direction of response by stock market in a country to price shocks highly depend on whether the country is a net importer or exporter in the world oil market, and whether changes in oil price are driven by supply or aggregate demand.

Abstract: While the relationship between oil prices and stock markets is of great interest to economists, previous studies do not differentiate oil-exporting countries from oil-importing countries when they investigate the effects of oil price shocks on stock market returns. In this paper, we address this limitation using a structural VAR analysis. Our main findings can be summarized as follows: First, the magnitude, duration, and even direction of response by stock market in a country to oil price shocks highly depend on whether the country is a net importer or exporter in the world oil market, and whether changes in oil price are driven by supply or aggregate demand. Second, the relative contribution of each type of oil price shocks depends on the level of importance of oil to national economy, as well as the net position in oil market and the driving forces of oil price changes. Third, the effects of aggregate demand uncertainty on stock markets in oil-exporting countries are much stronger and more persistent than in oil-importing countries. Finally, positive aggregate and precautionary demand shocks are shown to result in a higher degree of co-movement among the stock markets in oil-exporting countries, but not among those in oil-importing countries.