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Betting on war? Oil prices, stock returns, and extreme geopolitical events

Author

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  • Nygaard, Knut
  • Sørensen, Lars Qvigstad

Abstract

We show that the ability of oil price changes to predict stock returns is limited to periods of extreme geopolitical unrest. Four events generate most of the predictability: the 1973 Arab-Israel war, the 1986 OPEC collapse, the 1990/91 Persian gulf war, and the 2003 invasion of Iraq. We also find that a market-timing trading strategy based on oil price changes typically generates insignificant abnormal returns, contradicting previously published results. Our findings serve as an example of how a significant predictor in a time series forecasting regression may not be a useful or profitable market-timing signal.

Suggested Citation

  • Nygaard, Knut & Sørensen, Lars Qvigstad, 2024. "Betting on war? Oil prices, stock returns, and extreme geopolitical events," Energy Economics, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324003670
    DOI: 10.1016/j.eneco.2024.107659
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    More about this item

    Keywords

    Return predictability; Oil prices; International stock markets; Market efficiency; Stock returns;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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