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

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Author Info
Ramón Cobo-Reyes () (Department of Economic Theory and Economic History, University of Granada)
Gabriel Pérez Quirós () (Bank of Spain)

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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.

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File URL: http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers05_18.pdf
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Publisher Info
Paper provided by Department of Economic Theory and Economic History of the University of Granada. in its series ThE Papers with number 05/18.

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Length: 20 pages
Date of creation: 05 Sep 2005
Date of revision:
Handle: RePEc:gra:wpaper:05/18

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Related research
Keywords: oil price; Markov switching models.;

Find related papers by 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
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Pilar Bengoechea & Gabriel Pérez-Quirós, 2004. "A useful tool to identify recessions in the euro-area," Banco de España Working Papers 0419, Banco de España. [Downloadable!]
  2. Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October. [Downloadable!] (restricted)
  3. Diebold, Francis X & Rudebusch, Glenn D, 1990. "A Nonparametric Investigation of Duration Dependence in the American Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 596-616, June. [Downloadable!] (restricted)
    Other versions:
  4. James D. Hamilton & Gang Lin, 1996. "Stock Market Volatility and The Business Cycle," University of California at San Diego, Economics Working Paper Series 96-18, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  5. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March. [Downloadable!] (restricted)
  6. Jones, Charles M & Kaul, Gautam, 1996. " Oil and the Stock Markets," Journal of Finance, American Finance Association, vol. 51(2), pages 463-91, June. [Downloadable!] (restricted)
  7. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April. [Downloadable!] (restricted)
  8. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  9. Cetin Ciner, 2001. "Energy Shocks and Financial Markets: Nonlinear Linkages," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 5(3), pages 1079-1079. [Downloadable!] (restricted)
  10. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333. [Downloadable!] (restricted)
    Other versions:
  11. 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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