This paper investigates how explicit structural shocks that characterize the endogenous character of oil price changes affect stock-market returns in a sample of eight countries --- Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. For each country, the analysis proceeds in two steps. First, modifying the procedure of Kilian (2008a), we employ a vector error-correction or vector autoregressive model to decompose oil-price changes into three components: oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks. The last component relates to specific idiosyncratic features of the oil market, such as changes in the precautionary demand concerning the uncertainty about the availability of future oil supplies. Second, recovering the oil-supply shocks, global aggregate-demand shocks, and global oil-demand shocks from the first analysis, we then employ a vector autoregressive model to determine the effects of these structural shocks on the stock market returns in our sample of eight countries. We find that international stock market returns do not respond in a large way to oil market shocks. That is, the significant effects that exist prove small in magnitude.
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number
2008-51.
Length: Date of creation: Jul 2008 Date of revision: Publication status: Forthcoming in Energy Economics Handle: RePEc:uct:uconnp:2008-51
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Find related papers by JEL classification: G12 - Financial Economics - - General Financial Markets - - - Asset Pricing Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
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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.:
Driesprong, G. & Jacobsen, B. & Maat, B., 2003.
"Striking Oil: Another Puzzle,"
Research Paper
ERS-2003-082-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
[Downloadable!]
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)
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