Relationship between Oil Price Shocks and Stock Market Performance: Evidence for Select Global Equity Markets

In this article, we examine the relationship between oil price shocks and stock market behaviour using market index data for 15 sample countries. The sample countries are classified into four categories, based on their economic strength and oil exporting/importing status, to verify if the testable relationship varies across different economic settings. The study period ranges from 1 January 1993 to 31 March 2009. We find that on a pre-event basis, sample stock markets do not provide any extra normal returns. This implies that there are no serious leakages in oil price information, which could be exploited by investors in these markets. Further, after it is observed that irrespective of the nature of oil prices shocks (price increases and decreases), the high-growth emerging economies do provide significantly positive returns on post-event basis. Among the Asian economies, the Chinese stock market reacts to oil price shock in a lagged manner. Our findings are relevant for portfolio managers who are continuously on the lookout for global trading strategies that generate extra normal returns. From the policy makers’ perspective, given the high and stable demand for oil in the case of high growth emerging economies, it seems that supply side bottlenecks mainly cause the oil price shocks. Our work contributes to the market efficiency and behavioural finance literature in the global capital market context.